Tri-Partite Relationship Bars Discovery of Privileged Communications

Insurer is Also Client of Lawyer Appointed by it to Litigate For Insured

In Bank of America, N.A., et al v. the Superior Court of Orange County, No. G046829 (Cal.App. Dist.4 01/15/2013) the California Court of Appeal was asked to resolve a question of attorney client privilege and attorney work product protection when a Title insurer retained counsel to defend its insured. Bank of America and its insurer claimed privilege and that a tripartite attorney-client relationship existed among the insurer, insured, and counsel. As a consequence, confidential communications between either the insurer or the insured and counsel are protected by the attorney-client privilege, and both the insurer and insured are holders of the privilege. In addition, counsel’s work product does not lose its protection when it is transmitted to the insurer.

FACTS

Fidelity is the insurer and B of A is the insured under a lender’s title policy insuring a deed of trust. When B of A made a claim under the policy, Fidelity retained the law firm of Gilbert, Kelly, Crowley & Jennett LLP (GKCJ) to prosecute, on B of A’s behalf, the underlying lawsuit for equitable subrogation, injunctive relief, declaratory relief, and fraud. Defendant Pacific City Bank (PCB) served subpoenas duces tecum on Fidelity’s parent company and Lawyers Title Insurance Company (Lawyers Title), requesting production of documents, including communications between GKCJ and Fidelity regarding the litigation. B of A moved to quash or modify the subpoenas on the ground they sought confidential communications and documents protected by the attorney-client privilege or attorney work product doctrine. The respondent court denied the motions to quash or modify, and B of A and Fidelity brought this petition for writ of mandate or prohibition to challenge the court’s order.

STANDARD OF REVIEW

The standard of review for a discovery order is abuse of discretion. The appropriate test for abuse of discretion is whether the trial court exceeded the bounds of reason. When two or more inferences can reasonably be deduced from the facts, the reviewing court has no authority to substitute its decision for that of the trial court.

DISCUSSION

The nature of the tripartite attorney-client relationship in the insured-insurer relationship, the attorney characteristically is engaged and paid by the carrier to defend the insured. The insured and the insurer have certain obligations each to the other arising from the insurance contract. Both the insured and the carrier have a common interest in defeating or settling the third party’s claim.

“The three parties may be viewed as a loose partnership, coalition or alliance directed toward a common goal, sharing a common purpose which lasts during the pendency of the claim or litigation against the insured. Communications are routinely exchanged between them relating to the joint and common purpose – the successful defense and resolution of the claim. Insured, carrier, and attorney, together form an entity – the defense team – arising from the obligations to defend and to cooperate, imposed by contract and professional duty. This entity may be conceived as comprising a unitary whole with intramural relationships and reciprocal obligations and duties each to the other quite separate and apart from the extramural relations with third parties or with the world at large. Together, the team occupies one side of the litigating arena.”

Assuming for purposes of analysis the reservation of rights in this case did create a disqualifying conflict, PCB’s argument fails for two fundamental reasons. First, the right to invoke the conflict would belong solely to B of A.  PCB, as B of A’s adversary, cannot assert B of A’s right to Cumis counsel in order to create a waiver of the attorney-client privilege and attorney work product doctrine as to communications between GKCJ and the insurer, Fidelity.

The Court of Appeal concluded that a tripartite attorney-client relationship exists among Fidelity, B of A, and GKCJ; they are a unitary whole and share a common purpose lasting during the pendency of the claim or litigation. As a consequence, B of A and Fidelity are joint clients of GKCJ.

Confidential communications between lawyer and client are broadly protected from disclosure. The party claiming the privilege has the burden of establishing the preliminary facts necessary to support its exercise, i.e., a communication made in the course of an attorney-client relationship. Once that party establishes facts necessary to support a prima facie claim of privilege, the communication is presumed to have been made in confidence and the opponent of the claim of privilege has the burden of proof to establish the communication was not confidential or that the privilege does not for other reasons apply. B of A met its burden.

Material that includes an attorney’s analysis and legal assessment constitutes attorney work product.

The Court of Appeal granted the petition for writ of mandate or prohibition.

ZALMA OPINION

The Court of Appeal took more than 100 numbered paragraphs to reach this decision which is almost as old as liability insurance. When an insurer hires a lawyer to defend or pursue an action on behalf of its insured the insured and the insurer are clients of the lawyer and confidential communications and work product of the lawyer may not be discovered.

The case is important only because it applies the tri-partite relationship to title insurance and to cases where the insurer retains a lawyer to represent the plaintiff to pursue the insurer’s right of subrogation.

© 2013 – Barry Zalma

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

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

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

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

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Collateral Estoppel Establishes Damages

A Clairvoyant Court

The Connecticut Court of Appeals, defying Einstein’s theory of relativity, issued its opinion dated January 22, 2013 on January 17, 2013. In Roberto Marques v. Allstate, No. (AC 34169) (Conn.App. 01/22/2013) Marques appealed from the summary judgment rendered by the trial court in favor of Allstate Insurance Company, in this action to recover underinsured motorist benefits under an automobile insurance policy issued by Allstate for injuries he claims to have suffered in a collision between his automobile and that of an underinsured motorist.

FACTS

The record revealed that on July 31, 2006 Marques, while insured by Allstate under an automobile insurance policy affording him up to $50,000 in underinsured motorist coverage, was struck and injured while operating his motor vehicle by another motor vehicle operated by Scott E. Oshinski, whom the plaintiff claims to have been an underinsured motorist. Oshinski also had an automobile insurance policy with Allstate, with a liability limit of $20,000 per occurrence.

Following the collision, the plaintiff instituted a negligence action against Oshinski in the Danbury Superior Court which the parties subsequently submitted to binding arbitration. Prior to the arbitration hearing, which was held on December 9, 2010, the parties executed a “confidential high/low award range arbitration agreement.” At the conclusion of the hearing, the arbitrator issued an award in favor of the plaintiff on the issues of liability and damages. On the issue of damages, the arbitrator found, more particularly, that the sum of $20,000 constituted “fair, just and reasonable compensation for the plaintiff’s damages.” Because the damages, so determined, fell within the range of damages to which the parties agreed in their confidential high/low arbitration range agreement, the arbitrator’s award was unaffected by that agreement.

In compliance with the award, Allstate, as Oshinski’s insurance carrier, paid the plaintiff $20,000 as full compensation for all injuries and losses he had suffered as a result of the automobile collision.

Thereafter, on March 18, 2011, Marques commenced the present action against the defendant to recover underinsured motorist benefits under his automobile insurance policy with Allstate, alleging that because his actual damages resulting from the subject collision exceeded the $20,000 limit of Oshinski’s liability coverage, which had been exhausted, he was entitled to recover all damages in excess of that amount up to the limits of his underinsured motorist coverage under his policy. Allstate filed a motion for summary judgment on the ground of collateral estoppel, which the court granted.

On appeal, the plaintiff argued that the trial court improperly found that there is no genuine issue of material fact that his underinsured motorist claim in this case is barred by the doctrine of collateral estoppel.

ANALYSIS

Collateral estoppel, or issue preclusion, prohibits the relitigation of an issue when that issue was actually litigated and necessarily determined in a prior action. For an issue to be subject to collateral estoppel, it must have been fully and fairly litigated. The doctrine of collateral estoppel is based on the public policy that a party should not be able to relitigate a matter which it already has had an opportunity to litigate.

Collateral estoppel may be invoked against a party to a prior adverse proceeding or against those in privity with that party. The doctrine may be invoked offensively, in support of a party’s affirmative claim against his opponent, or defensively, in opposition to his opponent’s affirmative claim against him. The present case involves the defensive use of collateral estoppel, which occurs when a defendant in a second action seeks to prevent a plaintiff from relitigating an issue that the plaintiff had previously litigated in another action against the same defendant or a different party. In Connecticut it is well established that privity is not required in the context of the defensive use of collateral estoppel.

In order to recover underinsured motorist benefits under his policy with the defendant, it was incumbent upon the plaintiff to prove that his total compensatory damages resulting from the collision at issue exceeded the coverage available to compensate him for those damages under Oshinski’s liability policy. Because the issue of the plaintiff’s total compensatory damages resulting from the collision was actually litigated and necessarily determined in the binding arbitration hearing in his prior action against Oshinski, where the amount of such damages was found to be exactly $20,000 – an amount precisely equal to, and thus not exceeding, the limit of liability coverage under Oshinski’s automobile insurance policy – the defendant properly raised the doctrine of collateral estoppel defensively to prevent the plaintiff from relitigating that issue in this case.

As the moving party seeking summary judgment, it was incumbent upon Allstate to show that the judgment in the prior action could not have been rendered without deciding the issues upon which the present action was predicated. Allstate bore the burden of demonstrating that the issue raised in the present action, the amount of damages to which the plaintiff was legally entitled, was litigated and thus determined in the plaintiff’s prior arbitration with Oshinski. Because the defendant satisfied its burden of establishing the applicability of collateral estoppel and the lack of any genuine issue of material fact related thereto, we conclude that the court properly rendered summary judgment in favor of the defendant.

ZALMA OPINION

I am certain that Mr. Marques would like to go back in time rather than back to the future in this case. He tried his damages case and was awarded $20,000 and amount equal to the other party’s insurance coverage. He then sued his own insurer to recover more claiming that the $20,000 finding was not sufficient. Since the issue had been litigated the court correctly — albeit prematurely — affirmed the summary judgment.

© 2013 – Barry Zalma

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

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

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

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

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What is Physical Evidence of Loss?

Duty of Insurer to Prove Exclusion Applies

Burglary and theft are usually easy to prove: there is a broken window or door, full shelves are empty, cases are broken, debris is left by the burglars, or there are holes drilled in safes. Missing property, with little or no physical evidence of criminal activity is more difficult. When two packages of jewelry were not entered into inventory after delivery and could not be located a claim was made to National Grange Mutual Insurance Company and The Main Street Insurance Group (collectively “NGM”) who denied coverage for lack of physical evidence of theft. NGM appealed from a trial court grant of summary judgment in favor of Elegant Slumming, Inc (“Elegant Slumming”), its insured, in a property insurance coverage dispute over the application of an exclusion requiring physical evidence of loss in National Grange Mutual Insurance Company and v. Elegant Slumming, Inc. , No. 278, 2012 (Del. 01/09/2013).

The Supreme Court of Delaware was faced with NGM’s contention that the trial court erred in finding that the property insurance policy at issue requires only “some evidence,” rather than “physical evidence,” to show what happened to lost property.

FACTS

Elegant Slumming is a jewelry store specializing in selling precious jewelry, gold, platinum, gemstones, fashion jewelry and costume jewelry, owned by Phillip Livingston. The store has three fulltime employees, one of whom is Benjamin Killebrew.

Merchandise would often arrive at the store via the mail. Such packages contained very valuable items, so would need to be signed for by one of the three full time employees. When received, the packages would be placed under what was called the “wrap desk.” The packages would be opened later and the jewelry placed in a safe until they could be inventoried.

On the morning of June 24, 2010, Elegant Slumming received two packages. Delivery receipts signed by Killebrew indicate the packages contained jewelry worth $141,640. Killebrew placed the package under the wrap desk. Livingston remembers seeing the packages under the wrap desk on the day in question.

That day was a busy and stressful one for the employees of Elegant Slumming. Killebrew testified at his deposition he was particularly frustrated with the performance of a part-time employee. While closing up shop that afternoon, Killebrew began cleaning out trash located near the wrap desk.

Livingston realized two days later that the two packages for which he signed had not been inventoried. He then searched for the packages to no avail. Livingston called Killebrew, who initially stated he did not remember the packages, but offered to come into the store to assist in the search.

On his way to Elegant Slumming, Killebrew remembered his hasty disposal of the trash near the wrap desk. He made the connection, and it became clear to him that he had thrown away the packages by accident. Killebrew explained to Livingston that there were open and empty boxes right next to the wrap desk, and he threw away closed boxes along with the empty ones. Killebrew is “100%” sure he threw the two boxes away. The boxes have never been located.

Livingston submitted a claim to his property insurance carrier, NGM, which is a subsidiary of the Main Street America Group. The claim was denied. NGM denied the claim based on the following coverage exclusion in Elegant Slumming’s insurance policy: “We will not pay for loss or damage to property that is missing but there is no physical evidence to show what happened to it, such as shortage disclosed on taking inventory.”

Elegant Slumming brought suit in the Superior Court and the parties filed cross-motions for summary judgment. The trial court denied NGM’s motion and granted Elegant Slumming’s motion, finding that the coverage limitation only “requires some evidence of what happened to the missing property.” After further briefing and a hearing on damages, the trial court awarded Elegant Slumming $141,640 as payment for the lost jewelry.

IS THERE PHYSICAL EVIDENCE?

NGM first claims the trial court erred in finding that the insurance policy requires only “some evidence,” rather than “physical evidence,” to show what happened to lost property. The policy states “physical evidence” is required to “show what happened” to the lost property.

DECISION & ANALYSIS

The Delaware Supreme Court agreed with NGM that the trial court erred in concluding that verbal testimony satisfies the physical evidence requirement because it is not physical evidence.

Clear and unambiguous language in an insurance policy should be given its ordinary and usual meaning. When the language of an insurance contract is clear and unequivocal, a party will be bound by its plain meaning because creating an ambiguity where none exists could, in effect, create a new contract with rights, liabilities, and duties to which the parties had not assented. To find that a requirement of “physical evidence” is satisfied exclusively by testimonial evidence would be contrary to the plain and ordinary meaning of the term. “Physical evidence” means any article, object, document, record or other thing of physical substance. The Supreme Court concluded that testimonial evidence, by itself, is insufficient to constitute the “physical evidence” intended by the coverage exclusion.

The Supreme Court’s holding that testimonial evidence, by itself, does not constitute “physical evidence” did not end its analysis. Since it was dealing with an exclusion the burden was upon NGM to demonstrate that the policy exclusion applies. Elegant also presented “physical evidence” – as the court defined the term –  by introducing the purchase order invoices, the shipping receipts for the jewelry, photographs of the wrap desk area where the jewelry packages were placed upon arrival and photographs showing the close proximity of the trash bins to this area. These items of physical evidence, together with the testimony explaining their relevance, show what happened to the property and, therefore, the trial court’s judgment was affirmed for different reasons than stated in its judgment.

ZALMA OPINION

This is an odd decision because it turned photographs that do not show what happened but describe a scene and invoices showing receipt of the product, is physical evidence of the loss is reasoning backwards from an desire to indemnify the insured rather than to apply the wording of the policy of insurance. The jewelry packages could just have easily been taken by a customer during a busy day, by the less than effective part-time employee, or tossed away in the trash. The exclusion should be read to mean that there must be physical evidence, as defined by the court, that shows there was a loss by an insured cause of loss.

I would suggest revising the wording to read:

We will not pay for loss or damage to property where the loss is a result of:

  1. Unexplained or mysterious disappearance.
  2. Shortage found upon taking inventory.
  3. Shortage of property claimed to have been shipped when the package is received by the consignee in apparent good condition with the seals unbroken.
  4. Property that is found missing from the last place it was seen and where  there is no physical evidence showing it was taken as a result of theft or robbery.
  5. Property that is missing where there is no physical evidence to show what happened to it.

© 2013 – Barry Zalma

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

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

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

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

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Go Directly to Jail – Fraud Fails

Zalma’s Insurance Fraud Letter 

January 15, 2013

Continuing with the second issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the January 15, 2013 issue reports on how a hidden – in a location only known to law enforcement – vehicle Identification Number (VIN) on a Harley helped convict a person who falsely reported it stolen; a macabre insurance fraud scheme from South Africa used defraud life insurers; how an illegal rebating scheme cost a California insurer $1.25 million; why an adjuster’s license was revoked for fraud; and why National Union Fire Insurance was required to pay $6 million in penalties to the state of California.

Although insurance fraud continues to be the orphan child of the criminal justice system this month’s issue of ZIFL gives hope that the tide is turning and that more people who attempt fraud will be prosecuted, convicted and affirmed on appeal.

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

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

The last 10 of posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•    One Event – One Occurrence
•    Adjuster’s License Revoked for Fraud
•    Care Needed When Dealing With Public Adjuster
•    Never Give Up Good Tort Claim for Poor Bad Faith Claim
•    Absolute Immunity
•    Duty to Defend Potential Advertising Injury
•    If You Can Work You Are Not Totally Disabled
•    Private Limitation of Action
•    Assumtion Of Risk — A Broad Defense
•    “Public Policy” Can Rewrite an Insurance Policy

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

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

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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One Event – One Occurrence

Multiple Injuries Do Not Create Multiple Occurrences

Insurance companies, like everyone else, hate to be sued. They have no compunction, however, to sue another insurance company to avoid or limit their exposure to a serious incident. When 13 people died and 29 more were injured in a single accident the primary insurer claimed that its single occurrence limit applied and the excess insurer was obligated for any damages in excess of the primary limit. The multi-party suit was eventually settled and the excess insurer sought a second limit from the primary claiming there was more than one limit. The trial court disagreed and the Illinois Court of Appeal was asked to resolve the dispute in Jean Ware, As Personal Representative of the Estate of v. First Specialty Insurance Corporation, 2012 IL App 113340 (Ill.App. Dist.1 01/11/2013).

FACTS

At approximately 12:30 a.m. on June 29, 2003, a three-story porch located at the rear of the property at 713 West Wrightwood in Chicago, Illinois collapsed during a party, resulting in the deaths of 13 individuals and injuries to 29 more. The defendants assigned their rights against First Specialty Insurance Corporation (First Specialty) after reaching a settlement. Plaintiffs then filed this declaratory action against First Specialty, arguing that because the porch collapse constituted more than one occurrence, First Specialty was liable to them for the aggregate limit of the relevant insurance policy, $2 million, rather than the $1 million per occurrence limit that First Specialty had already paid. After the trial court granted the insurer’s summary judgment motion the plaintiffs appealed.

On the evening of June 28, 2003, the residents of the second- and third-floor apartments hosted a party. At approximately 12:30 a.m. on the morning of June 29, 2003, while all of the plaintiffs were standing on either the second or third floor, the third floor of the porch suddenly collapsed onto the second floor of the porch, which immediately collapsed onto the first floor of the porch.

The parties agree that “[t]here are no intervening acts or circumstances which could have or did contribute to and/or cause the deaths, injuries and/or mental conditions” suffered by the plaintiffs.

THE POLICY

At the time of the accident, Pappas’ property was insured by a policy issued by defendant First Specialty from February 1, 2003 to February 1, 2004. The policy’s “Coverage A Bodily Injury and Property Damage Liability” coverage unit had an “Occurrence Limit of $1,000,000 and a General Aggregate Limit of $2,000,000, subject to a $5,000 per occurrence deductible.”

The policy’s “Limits of Insurance” section provided that the most it would pay in any one occurrence was $1 million regardless of the number of persons injured.

THE CONSOLIDATED LITIGATION AND SETTLEMENT

Plaintiffs filed various complaints against the aforementioned insureds, which were later consolidated for discovery purposes only (hereinafter the Consolidated Litigation). The general thrust of those complaints was that the insureds’ failure to inspect the porch and maintain it in a reasonably safe manner was the cause of the plaintiffs’ deaths and injuries. First Specialty provided representation to the insureds and other defendants in the Consolidated Litigation, subject to a reservation of rights that the consolidated litigation “arose out of one accident or ‘occurrence’ and that First Specialty’s liability in connection with the Consolidated Litigation under no circumstances would exceed the Policy’s $1,000,000 Each Occurrence Limit.”

On March 11, 2010, the parties to the Consolidated Litigation, as well as Philadelphia Indemnity Insurance Company (Philadelphia), the insureds’ excess insurance carrier, entered into a settlement agreement resolving the litigation. As part of the agreement, all actions comprising the Consolidated Litigation were dismissed with prejudice.

On March 16, 2010, plaintiffs initiated the instant action against First Specialty, seeking a declaratory judgment stating that First Specialty was obligated to pay out an additional $1 million under the policy because the collapse constituted more than one occurrence. First Specialty denied these allegations, arguing that plaintiffs’ injuries all stemmed from one occurrence, the collapse, and therefore it was not required to pay an additional $1 million.

The trial court concluded that: “[T]here was simply one source of all Plaintiffs’ injuries and resulting deaths. The porch collapse, and only the porch collapse, was the dangerous condition causing harm to the Plaintiffs.”

ANALYSIS

The Illinois Court of Appeal was required  to interpret relevant provisions of the policy in order to determine whether the porch collapse and resulting injuries and deaths constituted a single occurrence under the policy language.

The policy defines “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” In light of this language, the appellate court could  see nothing in the policy which would support plaintiffs’ contention that the collapse constituted multiple occurrences under the policy. It was presented with two theories it could follow: the time and effect theory or the cause theory.

Under the effect theory, the fact that more than one person was injured and three claims were filed would mean that there were three ‘occurrences’ for purposes of determining liability coverage, absent specific policy language to the contrary. Under the cause theory, on the other hand, the fact that the damage to all of the persons injured resulted from the same conditions and was inflicted as part of an unbroken and uninterrupted continuum would yield the conclusion that there was only one occurrence.

Under the cause theory, the time at which injuries manifest themselves is irrelevant to a determination of the number of occurrences. The only relevant question is how many separate events or conditions led to a party’s injuries.

Applying the cause theory to the facts of this case leads to the inescapable conclusion that the collapse constituted only one occurrence under the policy. Because the parties are in agreement that the porch collapse was the single cause of all of plaintiffs’ injuries, there can be no question that, under the cause theory, the collapse constituted only one occurrence under the policy and, therefore, the trial court did not err in granting summary judgment in favor of First Specialty.

Plaintiffs, however, contend that Court of Appeal inquiry must go beyond the cause theory and apply the “time and space test” which, they alleged, requires a reversal of summary judgment in favor of First Specialty.  The time and space test is inapplicable in this case. The Illinois Court of Appeal found that the cause theory is controlling because it is undisputed that the injuries suffered by plaintiffs all arose from a discrete incident: the collapse of the porch. Because the plaintiffs’ losses all emanate from that single cause there is but one occurrence.

Moreover, even if the court was to apply the time and space test to the case at bar it would still reach the same result. The trial court in this case was presented with more than sufficient evidence to conclude that the cause of plaintiffs’ injuries was so closely linked in time and space as to be considered by the average person as one event. All of the Plaintiffs’ deaths and injuries can be directly traced to one cause: the porch collapse.

ZALMA OPINION

The insurers in this case were not governed by the usual greed found in cases where there is an assignment from the defendant the right to sue its insurer. See Never Give Up Good Tort Claim for Poor Bad Faith Claim. This was an coverage dispute and the parties agreed to protect the insured and then resolve their dispute over the primary’s aggregate limit in a single suit limited to the $1,000,000.  Although one million dollars is a good reason to litigate it is best to do so in a case where there is a good probability of winning.

© 2013 – Barry Zalma

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

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

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

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

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Adjuster’s License Revoked for Fraud

 No License for Fraudster

Michael Bresette sought relief from a final order of the Rhode Island Department of Business Regulation that permanently revoked his insurance claim adjuster’s license in Michael Bresette v. State of Rhode Island and Providence Plantations Department of Business, No. KC 12-0390 (R.I.Super. 01/07/2013) claiming that he did not receive proper notice of the administrative hearing that he did not attend. Prior to the hearing Bresette had been charged with five felony counts of insurance fraud and other criminal activities and multiple complaints for improper activities as an insurance adjuster.

Facts

The Department of Business Regulation (“Department”), is the administrative agency charged with regulating the practice of insurance adjusters in the State of Rhode Island. Bresette held a Rhode Island resident insurance adjuster’s license from March 5, 2009 until January 9, 2012. In December 2011, the Department – acting upon numerous customer complaints and information that Bresette had been indicted on eight felony counts of larceny and insurance fraud – decided to initiate administrative action against Bresette.

Bresette did not appear at the order to show cause hearing, where counsel for the Department appeared before a hearing officer and submitted evidence concerning the eight-count felony indictment and the consumer complaints that had been investigated prior to that date. Also presented was the evidence that notice of the hearing had been delivered to Bresette’s residence. The hearing officer who presided over the hearing prepared a written document that included findings of fact and conclusions of law based on evidence presented at the hearing. This document recommended that Bresette be defaulted based on his failure to appear and defend the administrative action, and that his insurance adjuster’s license be permanently revoked.

Bresette filed a motion to reconsider with the Department, along with an affidavit indicating that Bresette was out of the country and that he never received a copy of the hearing notice. The Department issued an order (“Order”) denying the motion to reconsider, based in part on Bresette’s failure to file this motion promptly after entry of the Department’s final Decision. The Order went on to state that even if the Motion to Reconsider had been timely filed, Bresette had not established good cause for the Hearing Officer to reconsider the matter. The Order concluded that the Department had effectuated service pursuant to its regulations and Bresette had not satisfied his burden of showing excusable neglect for failing to appear or otherwise respond.

Bresette filed a Complaint in Superior Court appealing the Department’s Decision, which permanently revoked Bresette’s insurance adjuster’s license.

Analysis

Pursuant to Rhode Island General Laws the Department of Business Regulation has authority over insurance claims adjusters and the power to suspend or revoke an insurance claim adjuster’s license “upon proof . . . that the interests of the insurer or the interests of the public are not properly served under the license, or for cause.”

Bresette seeks relief from the Decision issued by the Department, a designated administrative agency. The Decision, which permanently revoked Bresette’s insurance adjuster’s license, was based on the recommendations of the Department’s Hearing Officer, following a hearing on the matter held on January 9, 2012. These recommendations were then approved by the Director of the Department, who issued the Decision. Finding that review of the Department’s final orders will provide an adequate remedy.

On appeal, Bresette maintains that he never received notice of the administrative hearing and seeks relief from the Department’s default Decision permanently revoking his insurance adjuster’s license after Plaintiff failed to appear. In addition to not being served in person, Plaintiff submits an affidavit stating that he never received notice of the hearing at his mailing address when he returned. Although Plaintiff’s affidavit does not mention whether he received the notice sent by certified mail, Plaintiff argues in his brief that even if he had received notice sent by certified mail “purportedly left at his residence on January 7,” such notice does not constitute “reasonable notice” for a hearing.

Here, the record reflects that notice was sent to Bresette in accordance with the statute and the Department’s Rules. Notice of the hearing was mailed to Bresette’s home address – the address provided by Bresette and on file with the Department – by both regular and certified mail, although service by only one of these modes was necessary. The statement contained in the Decision claiming that Bresette was served notice of the hearing on December 29, 2011 is not in error, since the Rules clearly allow service to be considered effectuated upon the date of mailing.

The Rhode Island Supreme Court has established a two-part test for setting aside a default judgment on the basis of accident, mistake, unforeseen cause or excusable neglect. The person seeking relief must convince the trial justice of the adequacy of the reason given for his failure to respond to the court’s process and he must state a defense which is prima facie meritorious. Moreover, the moving party must make a “factual showing” in regard to this two-prong standard.

In Rhode Island, notice sent by regular mail to a person’s address of record and usual place of abode creates a presumption of receipt. As to certified mail, receipt of notice constitutes actual delivery as a notice by [certified] mail is considered to have reached a recipient when it is delivered where he normally receives mail. Bresette offered no explanation for his alleged failure to receive two separate forms of notice while receiving all other correspondence from the Department, including the Decision, Order and seven customer complaints which Bresette responded to in writing and are included in the record. Moreover, the mailed notices were never returned as undeliverable to the Department, thus reinforcing the presumption that the notices reached their final destination.

The record reflects that the Department mailed, and thus served notice upon Bresette on – twelve days in advance of the scheduled hearing date and more than the ten day notice provided for in the statute.  Prior to this date, Bresette had already been indicted and formally charged with eight felony counts, all stemming from events occurring while in his capacity as an insurance adjuster, an occupation regulated by the Department. These eight felony counts, which also served as the basis for the Department bringing sanctions against Bresette, had already been brought to Bresette’s attention by the Department well in advance of the show cause hearing. In fact, the record reflects that the Department, upon receiving each customer complaint which served as the basis of the respective felony charge, forwarded the complaint to Bresette and demanded a written response explaining the occurrence. These detailed explanations to the Department – individually written by Bresette within days of receiving each complaint – date back to 2010 and are contained in the record.

Thus, based on the facts of this case – including the severity of the criminal charges, Bresette’s prior knowledge of the allegations, and the Department’s authority to take immediate action to guard against any further harm to the public – this Court finds that the notice provided to Bresette of the show cause hearing was reasonable.

At the show cause hearing held on January 9, 2012, the hearing officer heard testimony and considered evidence concerning the five felony counts of insurance fraud and three felony counts of obtaining money under false pretenses that Bresette was indicted upon and later charged with by the Rhode Island State Police. Also considered by the hearing officer were seven consumer complaints against Bresette from different individuals, with dates of loss ranging from January 2010 to January 2011, each alleging improprieties relative to his conduct as an insurance claims adjuster. Based on such evidence submitted, the hearing officer further found that it would be in the public interest to immediately and permanently revoke Bresette’s insurance adjuster’s license.

The hearing officer found that Plaintiff committed the following violations: “(3) violating any insurance laws, or violating any regulation, subpoena, or order of the Department or of another state’s insurance commissioner;” “(5) improperly withholding, misappropriating, or converting any monies or properties received in the course of doing insurance business;” “(6) having been convicted of a felony;” “(7) having admitted or been found to have committed any insurance unfair trade practice or insurance fraud;” “(8) using fraudulent, coercive or dishonest practices; or demonstrating incompetence, untrustworthiness or financial irresponsibility in this state or elsewhere.”

Zalma Opinion

People who commit, and for many years, get away with insurance fraud have such unmitigated gall as to make Cyrano DeBergerac blush. The best defense Bresette was able to come up with was that he did not get notice and it was unfair to send him notice by mail. He made no comment about his violation of insurance laws, insurance fraud, and converted monies belonging to his clients. The court took his license and gave him the opportunity to present his argument before a court and an appellate court, treated his arguments with courtesy and then properly affirmed the revocation of the license of a person who gave the profession of insurance adjusting a bad name. In so doing he breached the code of conduct of the National Association of Public Insurance Adjusters, including those that provide: “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; Commission rates shall be fair and equitable, and strictly in accordance with the prevailing custom in the locality, and must, where laws or regulations of insurance departments exist, comply fully with such laws or regulations.

© 2013 – Barry Zalma

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

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

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

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

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Care Needed When Dealing With Public Adjuster

Cancel P.A. Contract At Your Own Risk

Public adjusters are often necessary when dealing with a major claim because they have the time and talent necessary to properly present a claim to an insurer on behalf of the insured. Most do a good job and comply with the Rules of Conduct promulgated by the National Association of Public Insurance Adjusters (NAPIA). In International Risk Control, LLC v. Seascape Owners Association, Inc, No. 14-12-00016-CV (Tex.App. Dist.14 01/08/2013) the Texas Court of Appeal was asked to reverse a summary judgment that made a public adjuster contract void because of technical errors and because public adjusting was an illegal practice of law.

BACKGROUND

Seascape Owners Association, Inc. (“Seascape”) is the managing corporation of a large condominium complex on Galveston Island. In September 2008, following the torrent of Hurricane Ike, many units on the property sustained extensive damage from water and wind. Seascape tried to assess the damage in the aftermath of the storm and collect the sums that it believed were due under its various insurance policies. When Seascape encountered difficulties in the collection process, it engaged the services of International Risk Control, LLC (“IRC”), a firm of licensed public insurance adjusters. The parties executed a written contract, providing for IRC’s assistance in the preparation and presentation of Seascape’s multiple insurance claims. In return for these services, Seascape agreed to pay IRC an eight percent commission on any amounts received or collected in settlement.

Pursuant to their agreement, IRC assessed the damaged properties, estimated the costs of repairs, and presented several insurance claims on Seascape’s behalf. The claims were only partially paid by Seascape’s carrier, the Texas Windstorm Insurance Association (“TWIA”). Of the amounts that were received, Seascape timely paid IRC its bargained-for commission. Seascape’s remaining share was still too low, however, for it to cover the projected costs of reconstruction. Seascape decided that more claims needed to be pursued, so it retained a local law firm in the hopes of maximizing any additional recovery.

Counsel, finding IRC’s work inadequate, informed IRC that its relationship with Seascape had been terminated. IRC was also advised that all monies owed to it had been paid and that IRC would receive no further compensation.

After severing ties with IRC, Seascape sued TWIA, asserting numerous causes of action, including fraud, breach of contract, and violations of the Texas Insurance Code. TWIA agreed to settle the dispute outside of court for a substantial sum of money. Believing that the settlement was achieved as a result of its own work product, IRC demanded its fair share of the proceeds. Hoping to end the dispute, Seascape sued IRC, seeking declaratory relief that IRC was not entitled to any additional compensation under the contract. IRC filed a counterclaim, asserting damages for breach of contract.

The trial court granted summary judgment in Seascape’s favor. In its final modified order, the court concluded that the contract between the parties was unenforceable, agreeing with the first and third bases of Seascape’s motion, but expressing no opinion on the contract’s illegality. The court ordered that IRC take nothing on its counterclaims, concluding that the settlement proceeds did not constitute a “claim” for which it could legally recover. The court also ordered IRC to pay Seascape reasonable attorney’s fees. IRC timely filed an appeal, challenging every basis for summary judgment that was argued in Seascape’s motion, including the award of attorney’s fees.

SUMMARY JUDGMENT

Seascape’s first argument is that the contract is unenforceable because it fails to comply with a Texas regulatory provision. The regulation sets forth specific requirements that must be complied with in contracts executed by public insurance adjusters. The requirements include statutory notices that must be printed on each contract, a statement explaining the method for calculating the adjuster’s compensation, and, as relevant to this appeal, a condition that the contract contains the name, address, and license number of the public insurance adjuster negotiating the contract.

Seascape contended that, without the license number, the contract is invalid and unenforceable. The Court of Appeal was guided, it claimed, by the rule described in American National Insurance Co. v. Tabor, 111 Tex. 155, 23 S.W. 397 (1921). In that case, the supreme court held that, unless a contract is declared by law to be void or unenforceable, a court should not refuse to enforce a contract simply because it is in contravention of a statute.

Following Tabor, the Court of Appeal noted that there is no legal provision, either statutory or regulatory, declaring a contract void or unenforceable because the contract fails to adhere to the requirements of the regulation. The legislature created an alternative in lieu of suspension or revocation, providing that an agent who contravenes a rule or regulation may be assessed an administrative penalty in an amount not to exceed $2,000 per violation if the commissioner determines that that action better serves the purposes of the statute.

The legislature only allowed for voidance of a contract by a public adjuster not licensed by the state but did not prescribe any other circumstance in which a contract may be avoided. Although the contract may be in contravention of the regulations, its technical deficiency is one that the court believed should be addressed administratively, rather than by avoidance.

Illegality and Public Policy

The trial court did not address Seascape’s argument regarding the legality of the contract, but because the argument is so closely tied to Seascape’s contention that the contract violates public policy, we consider them both together. Seascape argued in its motion that the contract was illegal, and therefore unenforceable, because its performance required IRC to engage in the unauthorized practice of law, which is prohibited by both statute and regulation.

The legislature has defined the “practice of law” to mean “the preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court.” The contract neither implicates the use of legal skill or knowledge, nor requires IRC “to represent” Seascape in a “cause of action” or other sort of legal capacity.

Seascape has also suggested that IRC engaged in the practice of law because “IRC and McGonigal sent demand letters to TWIA, ‘plugged in damage figures’, advised Seascape of the types of damages it was entitled to under the law, and gave TWIA representatives evaluations of Seascape’s claim.” The issue, as framed by Seascape’s motion, is whether the contract is unenforceable because its performance required IRC to engage in the unauthorized practice of law. Based on a plain reading of the contract it does not.

THE PUBLIC ADJUSTER CONTRACT

The contract is short, only two pages in length, and worded simply. In addition to several boilerplate provisions, it consists of just the following clauses: “Seascape Condominium Association [sic] (hereinafter “insured”) hereby engages International Risk Control, LLC (hereinafter “IRC”) to assist with the preparation and presentation of their insurance claims arising from loss and damages occurring on or about: September 13th and arising from Hurricane Ike (hereinafter “Claim”). Insured agrees to pay IRC for its claim services and hereby assigns eight (8%) percent of the amount received for Claim. The amount of IRC fee to insured can never exceed the eight percent of the amount of the Claim settlement.”

NOT A CLAIM

Seascape’s final argument was that IRC is barred as a matter of law from receiving any share of the settlement proceeds. Seascape essentially contends that IRC is limited in the types of “claims” from which it can recover, and the settlement is not one of them.

To prevail on this argument that IRC was not entitled to any share of the settlement proceeds, Seascape had to establish as a matter of law that the proceeds exclusively represented damages from its legal causes of action.

TWIA agreed to pay the settlement sum not because it was admitting its liability-it continued to deny liability, in fact-but “to avoid further costs and risks associated with continued litigation.” The agreement plainly states that the sum is being paid “in full and final settlement of all claims and causes of action” (emphasis added). Seascape’s insurance claims are necessarily included in that release.

Whether IRC is entitled to a share of the settlement proceeds is a factual determination the Court of Appeal did not consider. It limited its decision to conclude that Seascape has not carried its burden of showing, as a matter of law, that IRC is precluded from any sort of recovery.

ZALMA OPINION

If, after hiring a public insurance adjuster it is prudent to ask the public insurance adjuster to agree that its contract has been fulfilled. This is especially important when the insured intends to retain the services of a lawyer to obtain benefits the public insurance adjuster was unable to obtain.

If not the insured will, as did the Seascape Condominium Association, find that it must pay a fee to the adjuster and the lawyer for the work only done by the attorney. A public adjuster contract is a contract that can be amended, negotiated or modified just like any other contract.

© 2013 – Barry Zalma

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

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

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

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

 

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Never Give Up Good Tort Claim for Poor Bad Faith Claim

No Coverage – No Bad Faith

Litigants faced with a defendant whose insurer refuses to defend or indemnify will invariably seek a stipulated judgment from the defendant and assignment of its claim against the insurer. The reason being the plaintiff can collect both the stipulated amount of damages plus tort damages for breach of the covenant of good faith and fair dealing. However, a prudent plaintiff will first obtain the advice of competent coverage counsel advising that there is a viable cause of action against the insurer and also check the assets of the defendant to determine if it is capable of paying a judgment without use of insurance funds.

FACTS

The California Court of Appeal was called upon to resolve an an insurance dispute between Federal Insurance Company (Federal) and its insured Abigail Abbott Staffing Services, Inc. (Abbott). Abbot sought coverage for defense and indemnity of a claim of liability arising out of Abbott’s negligent referral of an employee who later embezzled money from Abbott’s client. In Newport Harbor Lutheran Church v. Federal Insurance Company, No. G046509 (Cal.App. Dist.4 01/03/2013), the court of appeal noted that after Federal denied coverage to Abbott, Abbott stipulated to a judgment in favor of the client, Newport Harbor Lutheran Church (the church), and assigned its claims against Federal to the church. The church sued alleging Federal had breached its obligations to Abbott under the policies when it denied Abbott coverage in connection with the church’s underlying claim and that Federal had acted in an unreasonably precipitous manner in doing so.

THE POLICIES

Federal issued both a commercial general liability (CGL) policy and a separate “commercial umbrella” policy to Abbott, covering the period October 1, 2001 to October 1, 2002. When Federal quoted a price to Abbott for these policies, it also offered Abbott the option of purchasing “Staffing Errors and Omissions” coverage for an additional premium. Abbott, acting through its authorized insurance broker, expressly declined the additional errors and omissions coverage.

Federal was obligated to provide Abbott with a defense against third party claims for “bodily injury or property damage” which occurred during the policy period and was caused by an accident. Federal was also obligated to indemnify Abbott against damages it became legally obligated to pay on account of such a claim.

The policy also specified a series of exclusions to coverage, including one entitled Standing alone, the “Professional Services” exclusion contained in the body of the policy excluded coverage for claims arising out of any professional services other than staffing and staffing placement services. However, one of a series of separate endorsements appended to the policy, entitled “Professional Liability,” stated without exception that “[t]his insurance does not apply to [injury or damage] arising out of the rendering or failure to render professional services or advice, whether or not that service or advice is ordinary to the insured’s profession . . . .” (emphasis added)

The separate umbrella policy like the CGL policy carried a similar endorsement.

CLAIM INVESTIGATION AND DECISION

On October 3, 2008, six years after the policy period ended, the church filed suit against Abbott, alleging causes of action for breach of contract, negligence and negligent misrepresentation. Although the church relied on Abbott to scrutinize the integrity and qualifications of any candidate it recommended, Abbott allegedly failed to make reasonable efforts to do that and consequently recommended the church hire Cheryl Granger, a woman with a history of criminal conduct. The church hired Granger and over a period of approximately three years spanning December 2002 to December 2005, she allegedly embezzled a total of nearly $400,000 from the church.

After obtaining nothing more than a copy of the complaint from Abbott, after several requests, Federal sent a letter explaining it was declining coverage for the loss claimed by the church because the church’s claim was based on the embezzlement of money, the church’s financial loss had occurred outside of the policy period and because the claim arose out of Abbott’s performance of professional services, which were excluded from coverage.

After Abbott contested the denial Federal hired coverage counsel and on September 21, 2009, that counsel sent a lengthy letter to Abbot’s defense counsel reaffirming and explaining Federal’s decision to deny coverage for the church’s claim. Thereafter, Abbott agreed to entry of a stipulated judgment in favor of the church. Specifically, Abbott and the church stipulated “Granger stole not less than $323,870.70″ from the church” and further stipulated to entry of a judgment in favor of the church, and against Abbott, in that specific amount. Abbott and the church also agreed that in exchange for the church’s covenant not to record the stipulated judgment against Abbott, or to execute the judgment against Abbott or any person associated with it, Abbott assigned to the church any claims it had against its insurers arising out of the insurers’ failure to defend and/or indemnify Abbott in the case and gave up the opportunity to recover from Abbott’s own funds.

TRIAL COURT DECISION

The trial court ordered summary judgment in Federal’s favor. The court’s formal order explained summary judgment was appropriate for several reasons:

  1. There was no evidence the church suffered any loss during the policy period because the first of the checks forged by Granger was dated September 30, 2002 but was not processed by the bank until October 2, 2002, one day after the policy period of the Federal Policies expired;
  2. The laptop that was stolen by Granger was not purchased until September of 2005 well after the policy period;
  3. There was no coverage because professional placement services and/or advice provided by Abbott was the alleged cause of the church’s loss; and
  4. The professional liability exclusion contained in the endorsement to the Federal general liability policy prevails over any conflict with the professional liability exclusion in the main body of the policy.
  5. The court concluded that a permanent loss of property caused by a conversion does not qualify as a “loss of use” of that property for purposes of the “property damage” definition contained in the policies.

DISCUSSION

The net effect of the professional services exclusion, if considered in the abstract, was to provide coverage for most errors or omissions Abbott committed in the course of providing staffing or staffing placement services, while excluding coverage for liability arising out of any other professional service it provided. That exclusion did not exist in the abstract. Instead, it must be read in the context of the policy as a whole, which included a series of separate endorsements – one of which stated, without exception, that the insurance would not apply to injury or damage arising out of the rendering of or failure to render professional services or advice, whether or not that service or advice is ordinary to the insured’s profession.

In California, as explained in Aerojet General Corp v. Transport Indemnity Co. (1997) 17 Cal.4th 38, 50, fn. 4 (Aerojet), “‘[i]f there is a conflict in meaning between an endorsement and the body of the policy, the endorsement controls.'”

As Aerojet explains, insurance policies fall into two general categories: “standard” policies, which are described as those policies issued on standard forms containing terms and conditions drafted by the insurer and “manuscript” policies, which are entirely nonstandard and drafted for the particular risk undertaken. But the terms of “standard” policies are frequently altered because often, the insurer is willing to modify or change the standard forms by endorsements.  The very purpose of an “endorsement” is to alter what are otherwise standardized provisions included in the body of a form policy to suit the particular needs of the parties.

The policy issued to Abbott also included a separate “Professional Liability” endorsement that represents an agreement to modify or change an otherwise standard term of the 27-page form.

The undisputed evidence demonstrates Federal offered Abbott the option of purchasing “errors and omissions” coverage, and Abbott expressly rejected that option. Having done that, Abbott could not reasonably argue it was entitled to coverage for its professional errors and omissions under the policy Federal issued. And because the church stands in the shoes of Abbott for purposes of this case, it cannot claim that either.

ZALMA OPINION

This case is a perfect example of greed overcoming good sense. If Abbott, who was able to retain independent counsel, had sufficient assets to pay the judgment the Church would have been more prudent to get a judgment against Abbott and collect it. Abbott, if it thought it had a case against Federal it could have sued.

Because the Church saw an opportunity to get payment from an insurer, including damages in excess of its loss, received nothing from its effort. Had the Church hired competent insurance coverage counsel before agreeing to the stipulated judgment and assignment it would have learned how effective the endorsement was and would have pursued the tortfeasor. Instead, it funded two separate lawsuits and an appeal to recover nothing.

© 2013 – Barry Zalma

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

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

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

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

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Absolute Immunity

Insurance Criminal May Not Sue State Officers

States are called upon to enforce sanctions against insurance agents and brokers who violate the law and defraud the public. In doing so they act as both police agencies and administrative agencies dealing with licenses to practice insurance. Because criminals and those who violate insurance laws and regulations to defraud the public are less than reasonable and honorable persons, public officials must be protected from vexatious individuals so that they can carry out their duties without fear of multiple lawsuits.

An investigation into the questionable business practices of Alan D. Knowlton’s (“Knowlton”) employer, Bankers Life and Casualty Co. (“Bankers Life” or “the Company”), eventually led the Maine Bureau of Insurance (“the Bureau”) and the Maine Attorney General’s Office (“the AG’s Office”) to Knowlton’s front door. Knowlton accepted responsibility for his own unlawful conduct and Judith Shaw, Glenn Griswold and Andrew Black (collectively, “the state officials”), representing the Bureau and the AG’s Office agreed to take no further action against Knowlton. That promise turned out to be short-lived, however, when they agreed to Knowlton’s termination in a separate agreement with Bankers Life. Knowlton sued the state officials and lost and the First Circuit Court of Appeal, in Alan D. Knowlton v. Judith Shaw; andrew Black; Glenn Griswold, No. 12-1251 (1st Cir. 01/04/2013), was asked to resolve the dispute and allow Knowlton to continue to work.

BACKGROUND

In or around 2001, the Bureau began investigating Bankers Life’s improper marketing practices targeting elderly consumers. Shaw, the Bureau’s Deputy Superintendent, became involved and initiated a parallel investigation into Bankers Life’s sales practices. Griswold, Director of the Consumer Healthcare Division of the Bureau, led that investigation. In or around January 2005, after finding that Bankers Life had engaged in improper sales practices in Maine, Assistant Attorney General Black, Shaw and Griswold began negotiating with Bankers Life to resolve those claims.

Bankers Life was not the only one on the state officials’ radar, however. Shaw, Griswold and Black quickly turned their attention to Knowlton, the Company’s Branch Sales Manager in Bangor, Maine, after learning about his November 2004 sales recruitment meeting. At that meeting, he distributed materials representing that Bankers Life had an “A” rating by A.M. Best Company, when its rating was actually a “B++.” In response to an attendee’s comment that he was pleased about the “A” rating, Knowlton said he hoped to see it improve.

On the heels of the investigation into Knowlton’s actions, Knowlton entered into a consent agreement with the AG’s Office and the Bureau to resolve licensing violations associated with the sales recruitment meeting and his conversation with the potential recruit. In the agreement, Knowlton admitted that he violated the Maine Insurance Code by distributing materials containing a misleading representation about Bankers Life’s financial condition and by acknowledging the attendee’s comment about the A.M. Best Company rating. In addition to accepting responsibility for those violations, he agreed to submit to a 60-day suspension of his insurance producer license and a 270-day period of license probation, pay a civil penalty of $750.00, and comply with other requirements regarding recruiting materials and the reporting of consumer complaints. In exchange, the Bureau and the AG’s Office agreed to “forgo pursuing further disciplinary measures or other civil or administrative sanctions against [him] for the violations” described in the agreement.

Not one week passed before the Bureau and the AG’s Office entered into a separate consent agreement with Bankers Life to resolve the claims against it. During their negotiations, the Bureau accepted Bankers Life’s proposal that the branch managers of its South Portland and Bangor branch offices (which included Knowlton’s position as the Bangor branch manager) be terminated. Thus, the agreement called for Bankers Life to “relieve the managers of its South Portland and Bangor branch offices of their positions as branch managers.” Bankers Life terminated Knowlton’s position as branch manager on April 14, 2005.

Knowlton’s complaint asserts claims against Shaw, Black and Griswold in their individual capacities for violations of 42 U.S.C. § 1983 and 42 U.S.C. § 1985(2). Specifically, the complaint alleges that by agreeing to Bankers Life’s termination of Knowlton’s position as branch manager, the appellees deprived Knowlton of continued employment with the Company without due process under § 1983. The complaint added that Shaw, Black and Griswold violated his rights under § 1985(2) by participating in a conspiracy with the Bureau and Bankers Life to deprive him of his rights to challenge the termination provision in the consent agreement.

The state officials moved to dismiss the complaint on several grounds, including absolute immunity for the § 1983 claim. In granting the motion, the district court agreed that absolute immunity protected the state officials from liability. The court further concluded that Knowlton failed to plead a plausible claim.

DISCUSSION

Absolute Immunity

Absolute immunity is not available to either prosecutors or agency officials whose actions are primarily administrative or investigative in nature and unrelated to their functions as advocates in preparing for the initiation of a prosecution or for judicial proceedings. In considering whether absolute immunity attaches to an official’s conduct, the First Circuit employs a functional approach where the availability of absolute immunity turns on a functional analysis which looks to the nature of the function performed, not the identity of the actor who performed it.

Shaw and Griswold, as representatives of the Bureau, have the duty and authority to enforce Maine’s insurance laws, and through the AG (Black), may invoke the aid of the Superior Court through proceedings to enforce any action taken by the Bureau or pursue criminal prosecution based on violations of the Code. An enforcement petition need not, however, reach an administrative proceeding or even the courthouse door. The Bureau may decide to execute consent agreements that impose penalties or fines authorized by law to resolve a complaint or investigation without further proceedings. The decision to resolve the violations before pursuing further proceedings not only arose directly from their roles as the State’s advocates in enforcing Maine’s insurance laws, but was inextricably related to the judicial process. Absolute immunity promotes effective government, where officials are freed of the costs of vexatious and often frivolous damages suits that may result from their decisions.

While no administrative proceeding was initiated in this case (only a petition to enforce was issued), we see no meaningful difference between the nature of an agency official’s decision to pursue an administrative proceeding and that of her decision to resolve a violation before reaching that step. In both instances, the agency official acts as the State’s advocate, exercising the broad discretion in deciding whether a proceeding should be brought and what sanctions should be sought. The discretion officials exercise in deciding which cases should move forward to further legal proceedings and which may be resolved with consent agreements might be distorted if their immunity from damages arising from that decision was less than complete.

The state officials’ decision to agree to the termination provision, however, need not be put in the framework for adversarial testing and judicial supervision, for absolute immunity to apply.

The state officials carried their burden in establishing they are entitled to absolute immunity for entering into the consent agreements with Knowlton and Bankers Life and the First Circuit affirmed the district court’s dismissal of Knowlton’s claims against the state officials.

ZALMA OPINION

The first circuit should be commended for providing the officials with absolute immunity from Knowlton’s action. Knowlton should have been happy with the deal he made with the state since his acts were clearly wrong and in violation of his promises when he was licensed.

That the state gave him a minor suspension of his license and allowed him to return to work should have been enough. Bankers Life was obviously upset that he, and others, had put them into trouble with the state and did not want to keep Knowlton on the payroll. To sue the state for agreeing that Bankers Life could fire him was, in my opinion, an act of unmitigated gall. Knowlton is still licensed in Maine and can work if he wishes. He is not entitled to keep a job, especially after putting his employer in a position to be sued by those to whom he lied.

The mercy shown to Knowlton by the state was rewarded with a lawsuit rather than Knowlton losing his license or spending time in jail.

© 2013 – Barry Zalma

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

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

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

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

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DUTY TO DEFEND POTENTIAL ADVERTISING INJURY

USE OF ADVERTISING IDEA

The Wisconsin Court of Appeal was asked to resolve a dispute regarding an insurance company’s duty to defend under a commercial general liability (CGL) policy against allegations of advertising injury based on use of another’s “advertising idea” in Air Engineering, Inc v. Industrial Air Power, LLC, Christopher Klemz and Matthew, No. 2012AP103 (Wis.App. 01/03/2013). In the underlying lawsuit, Air Engineering, Inc. sued Industrial Air Power, LLC alleging various causes of action based on Industrial’s alleged misappropriation and use of Air Engineering’s website source code and site content and an internet advertising system that was designed to place advertisements for the company on potential customers’ computers. Acuity, Industrial’s insurer, intervened and moved for a declaratory judgment that it had no obligation to defend, and therefore, no obligation to indemnify, Industrial against Air Engineering’s claims in the underlying action. The circuit court granted declaratory judgment in favor of Acuity, concluding that the complaint did not allege facts that, if true, would give rise to a duty to defend against allegations of advertising injury.

BACKGROUND

The complaint described four systems that Air Engineering claims Industrial misappropriated and used in its own marketing: the Parts Purchasing System, the Customer Database System, the Internet Advertising System, and the Website Source Code. Air Engineering refers to the first three systems collectively as the Proprietary Systems. For our purposes, the most important of these is the Internet Advertising System.

Air Engineering buys air compressor replacement parts and related products and sells them to end-user customers. Air Engineering maintains a website for which it created source code, the Website Source Code. Air Engineering also developed a system of targeting potential customers based on their online searches. As alleged in the complaint, the Internet Advertising System allowed Air Engineering to gain customers.

Air Engineering has kept the Proprietary Systems and the Website Source Code confidential. The Proprietary Systems and the Website Source Code have great economic value to Air Engineering and are essential to Air Engineering’s business success and profitability because they allow Air Engineering to make its products more attractive to, and give Air Engineering enhanced access to, customers and potential customers through Google searches and in other respects.

Christopher Klemz and Matthew Kraus were both employees of Air Engineering, were familiar with the Proprietary Systems and Website Source Code, and were advised that the systems were confidential. Klemz registered a website name for and incorporated Industrial while he was employed by Air Engineering.

As further alleged in the complaint, much of Industrial’s website source code and content are identical to Air Engineering’s Website Source Code and content. Shortly after Klemz and Kraus left Air Engineering two customers with whom Air Engineering had long-term relationships quit buying replacement parts from Air Engineering and started buying the same parts from Industrial – at lower prices.

Acuity agreed to defend Industrial, reserving its right to deny coverage for uncovered claims. Acuity moved for declaratory judgment, asking the circuit court to declare that it had no duty to defend and therefore no duty to indemnify Industrial against Air Engineering’s claims. The circuit court granted declaratory judgment, and Industrial appeals.

DISCUSSION

The Wisconsin Court of Appeal determines whether there is a duty to defend by comparing the allegations in the complaint with the terms of the policy, sometimes called the four corners rule, where the duty to defend is basely solely on the four corners of the complaint; no extrinsic facts or evidence are considered. The insurer has a duty to defend when the allegations, if proven, give rise to the possibility of recovery under the terms of the policy.

Industrial argued that Acuity had a duty to defend under the advertising injury portion of the Acuity CGL policy. The Court, in reaching its decision had to answer three questions:

  1. Does the complaint allege a covered offense under the advertising injury section of the policy?
  2. Does the complaint allege that Industrial engaged in advertising activity?
  3. Does the complaint allege a causal connection between Air Engineering’s alleged injury and Industrial’s advertising activity?

Acuity’s CGL policy provides, in relevant part, as follows.

1. Insuring Agreement                

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of personal and advertising injury to which this insurance applies. We will have the right and duty to defend the insured against any suit seeking those damages….         

   * * *
SECTION V – DEFINITIONS
        
1. “Advertisement” means a notice that is broadcast or published to the general public or specific market segments about your [Industrial's] goods, products or services for the purpose of attracting customers or supporters….

    * * *
        
14. “Personal and advertising injury” means injury, including consequential bodily injury, arising out of one or more of the following offenses:

    * * *
        
f. The use of another’s advertising idea in your [Industrial's] advertisement ….

Coverage of Offenses Alleged

Section (f) of the Acuity policy defines an advertising injury as the use of another’s advertising idea in the insured’s advertisement. The facts alleged are that Air Engineering developed the Proprietary Systems, including the Internet Advertising System, to enable it to provide information about its products to potential purchasers. Further, the facts allege Industrial’s use of the Proprietary Systems without Air Engineering’s consent to market Industrial’s products and services and to solicit business.

We must decide whether the alleged facts describe the “use of another’s advertising idea in your advertisement.” “Advertising idea” is not defined in the policy. An “advertising idea” is an idea for calling public attention to a product or business, especially by proclaiming desirable qualities so as to increase sales or patronage.

Air Engineering alleges that it developed the Internet Advertising System to advertise its products to the public in order to facilitate sales. Industrial used that information to do the same. Air Engineering’s system recognizes relevant terms in a potential customer’s online search and strategically directs select advertisements to that customer, including purchased domain name links to product information. Air Engineering’s system is an idea for calling public attention to a product or business, especially by proclaiming desirable qualities, in this case, suitability to the customer’s needs, to increase sales or patronage. Industrial’s use of the Internet Advertising System, as described in Air Engineering’s complaint, is “use of another’s advertising idea.”

Industrial’s Advertising Activity

The complaint alleges that Industrial used information contained in the Proprietary Systems, including the Internet Advertising System, and the Website Source Code to create and operate its business, market its products and services, and solicit business, including business from Air Engineering’s present and prospective customers. By comparing the allegations to the CGL policy definition of advertisement: “a notice … broadcast … to the general public or specific market segments about your goods, products or services for the purpose of attracting customers” the appellate court concluded that using the Internet Advertising System to place ads is advertising activity.

Causal Connection Between Advertising Activity and Advertising Injury

Finally the appellate court needed to determine if the complaint alleged a causal connection between Industrial’s advertising activity and Air Engineering’s advertising injury. The complaint alleged that Industrial used the Proprietary Systems, including the Internet Advertising System, to market products and services to potential customers. It further alleged that shortly after Kraus left Air Engineering for Industrial, two long-term customers left Air Engineering and entered into contracts with Industrial. The advertisement does not need to be the only cause of the injury to trigger the duty to defend. Air Engineering contends that Industrial used its advertising ideas to draw past and potential customers away, thus causing business loss to Air Engineering. Assuming Industrial used Air Engineering’s advertising system to target potential customers, it is reasonable to infer that such usurped techniques did draw customers away from Air Engineering and concluded that the causal connection requirement was met.

Knowing Violation of Rights Exclusion

Acuity also  argued that the “knowing violation” exclusion bars coverage. The CGL policy includes the following exclusion: “Personal and advertising injury caused by or at the direction of the insured with the knowledge that the act would violate the rights of another and would inflict personal and advertising injury.”

The exclusion failed because the maxim of insurance interpretation requires that if even one covered offense is alleged in the underlying complaint, the insurance company has a duty to defend. Air Engineering stated potentially covered claims that do not base liability on a showing of a knowing violation of another’s rights and infliction of advertising injury.  There may be other exclusions in the policy that apply to these claims, and there may be other claims that could be proven without showing knowledge or intent. The inclusion in the complaint of an allegation of willful and malicious conduct does not relieve Acuity of its duty to defend.

ZALMA OPINION

In a four corners state like Wisconsin it is almost impossible to avoid a duty to defend if there are allegations that potentially come within the promises made by an insurance policy. That there was a use of advertising or advertising idea was clear from the facts alleged in the complaint. Since the insurer was not allowed to bring in extrinsic evidence the court was able to use the allegation of the complaint to make insurance coverage exist where none was intended.

The best solution for insurers in such a situation is to provide the defense under a strict reservation of rights, take the case to trial, and when the real causes of action are proved, sue the insured to get the money back.

The prudent plaintiffs’ lawyer in a four corners state will always include allegations that will bring – at least one – cause of action within the coverage of a standard CGL to get an insurer’s deep pocket available for a quick settlement.

© 2013 – Barry Zalma

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

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

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

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

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If You Can Work You Are Not Totally Disabled

Test Is Abuse of Discretion

A trial court granted judgment to Connecticut General after concluding that it had not abused its discretion in terminating the disability benefits owed to Dennis Siegel.  In Dennis Siegel v. Connecticut General Life Insurance Company; Group Long Term Disability For Salaried Employees of Lockheed Martin Corporation, No. 12-1897 (8th Cir. 01/02/2013) the Eighth Circuit Court of Appeal was asked to reverse the finding and continue Siegel’s benefits.

FACTS

Siegel worked as a software developer for Lockheed Martin Corporation (previously Martin Marietta Corporation). Lockheed had a disability benefit plan through Connecticut General which provided long term benefits to disabled employees. Under the 1994 policy that governed the plan, an employee would receive benefits if he became unable to perform the essential duties of his occupation due to an illness or injury. If the employee’s disability was due to mental illness, he would stop receiving benefits after the first two years unless he was “totally disabled.” That was defined as being unable to perform the essential duties of any occupation for which the employee was or could reasonably become qualified.

Siegel first applied for benefits in 1995, stating that he had developed severe depression in 1993 which had required him to take leaves of absence from Lockheed in 1993 and 1995. Siegel also submitted a claim form filled out by his psychiatrist indicating that his client had severe depression. Connecticut General approved Siegel’s claim in October 1995. In November 1997 it reapproved his claim for continued benefits, concluding that he was incapable of employment in “any occupation.” Connecticut General requested and received periodic updates from Siegel’s doctors regarding his condition.

In 2002 Lockheed and Connecticut General executed an agreement entitled “Employee Welfare Benefit Plan Appointment of Claim Fiduciary” (claim fiduciary appointment). The agreement stated that Connecticut General’s sister company Life Insurance Company of America (LINA) would be appointed as “claim fiduciary” and would have responsibility for adjudicating all claims and appeals for benefits under the Lockheed plan. LINA was expressly given authority “in its discretion” to “interpret the terms of the plan” and “decide questions of eligibility.” Lockheed advised plan beneficiaries in a summary plan description in 2005 that its insurance carrier would have “full discretionary authority to interpret and construe the terms of the Plan [and] to decide questions related to the payment of benefits.”

THE REQUEST TO DO LIGHT WORK

Siegel sent a letter to LINA in 2006 asking whether he could obtain part time employment without losing his disability benefits. Siegel described his family’s tightening budget and asked “the number of hours [he] could potentially work and/or the amount of income allowed.” LINA informed Siegel of the relevant provisions of the plan which allowed totally disabled beneficiaries to pursue “rehabilitative work” for a limited time.

THE INVESTIGATION

LINA opened an investigation into Siegel’s continued eligibility and requested that he complete a questionnaire about his daily activities. Siegel reported that he used a computer daily, watched television for five to six hours, did laundry, attended religious services, volunteered two days a week for one hour, and could drive a “couple hundred miles with breaks.” Siegel explained that he was unable to return to work due to a “lack of concentration and inability to plan and follow through.”

LINA then sought records and questionnaires from each of Siegel’s physicians related to his ability to work. Dr. James Beeghly, Siegel’s psychiatrist, indicated that he suffered from “[p]ersistent and unremitting depressed mood and pessimistic outlook,” “poor ability to focus,” “poor ability to maintain pace,” and “poor ability to apply self-discipline.” Dr. Beeghly reported that Siegel’s memory, thought process, and judgment were normal. In one of his office notes obtained by LINA, Dr. Beeghly expressed frustration that Siegel had not been seeing a therapist as he had recommended. Siegel’s other physicians reported only minor conditions and either declined to perform a disability assessment or did not report that he was disabled.

TERMINATION OF BENEFITS

LINA informed Siegel in September 2007 that his benefits would be terminated, explaining that it had concluded he was no longer incapable of employment. Siegel was invited to provide additional medical opinions and supporting documentation if he disagreed with LINA’s conclusion. Siegel responded with additional documentation in March 2008. A form filled out by his primary care physician indicated that Siegel was disabled, but it did not give any further information as to his medical history, diagnosis, or treatment. Several sections were left blank. A report by a neuropsychologist who had examined Siegel concluded that he likely had “relatively severe, presumably treatment-resistant depression” but that there was “no evidence for neuropsychologically based intellectual or memory impairment.”

Two experts retained by LINA conducted an independent review of Siegel’s file. After reviewing Siegel’s medical documentation, psychologist Dr. Nick DeFilippis concluded that he retained several functional capabilities. These included “ability to focus and concentrate,” “higher level executive functioning,” and social skills. Based on Dr. DeFilippis’ findings, vocational rehabilitation specialist Ginny Schmidt identified three entry level occupations in which Siegel could work: repair order clerk, production clerk, and mail sorter. LINA informed Siegel in September 2008 that after reviewing his entire file, it had concluded he was capable of employment and therefore no longer disabled.

THE ADMINISTRATIVE APPEAL & TRIAL

Siegel filed an administrative appeal with LINA in June 2009. Siegel submitted additional reports from his psychiatrist Dr. Beeghly, his neuropsychologist Dr. John Bayless, and two other physicians who had subsequently examined him. LINA then retained another psychiatrist, Dr. Jack Greener, to review Siegel’s records. Dr. Greener concluded that the reports from Drs. Beeghly and Bayless did not objectively support a finding of total disability. In October 2009 LINA affirmed its decision to terminate Siegel’s benefits, and it ceased payments to him.

The parties agreed to have a court trial limited to the administrative record. Each side then moved for judgment in its favor. The district court granted LINA’s motion for judgment, concluding that LINA had not abused its discretion because it had conducted a full and fair review and there was substantial evidence to support its decision. Siegel appeals, arguing that the district court should have applied de novo review, but that even under an abuse of discretion standard LINA’s decision should be overturned.

ANALYSIS

The standard of review for a denial of benefits when challenged under is de novo, unless the benefit plan gives the administrator or fiduciary discretionary authority to determine eligibility for benefits or to construe the terms of the plan. If there has been a valid grant of discretionary authority, the administrator or the fiduciary’s decision is reviewed for abuse of discretion.

With the consent of the parties the case was subsequently assigned to a magistrate judge who determined that the 1994 policy governed Siegel’s claim. Since the 1994 policy did not require that amendments be “endorsed on or attached to” it, the magistrate judge concluded that the claim fiduciary appointment had been a valid amendment and that LINA’s decision would be reviewed for abuse of discretion.

The Eighth Circuit agreed with the district court that LINA did not abuse its discretion in terminating Siegel’s benefits. To be “totally disabled” under the plan’s definition, Siegel must have been unable to perform the essential duties of “any occupation for which [he is] or may reasonably become qualified.” There was substantial evidence from which LINA could reasonably conclude that Siegel was able to work. Siegel expressed an interest in part time work and had asked LINA how much he could work and earn without losing his disability benefits.

Although Siegel’s treating physicians indicated that he suffered from depression and lack of motivation, they did not identify any specific impairments or deficiencies. Only Dr. Beeghly was willing to certify that Siegel was disabled, and even he expressed some doubt on the subject. The experts retained by LINA all agreed that while Siegel exhibited symptoms of severe depression, he was not totally incapable of employment. The Eighth Circuit concluded that on this record, it was not an abuse of discretion to terminate Siegel’s benefits.

ZALMA OPINION

This case teaches disabled workers to be careful about what you asked for because you might just get it. Siegel wanted to earn a little extra money and asked his insurer for permission to do so. Since the ability to do any work is an indication of a lack of total disability the insurer investigated, found he was not totally disabled, and properly stopped the benefits. The appeal failed because there was no abuse of discretion in the trial court who was presented with evidence that was sufficient to prove that Siegel could work.

© 2013 – Barry Zalma

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

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

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

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

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Private Limitation of Action

Rights Not Exercised Promptly Are Lost

The Ohio Court of Appeal was asked by Geraldine Offill (Offill) to reverse a judgment on the pleadings rendered against her on her complaint, and in favor of State Farm Fire & Casualty Company (State Farm) in Geraldine Offill v. State Farm Fire & Casualty Company, 2012 -Ohio- 6225. (Ohio App. Dist.2 12/31/2012). Offill contended that the trial court erred in granting State Farm’s motion for judgment on the pleadings because her breach of contract claim was brought well within the fifteen-year statute of limitations set forth in Ohio statutes. Offill further contends that even if she was required to start her action against State Farm within one year of the loss of her personal property, she timely started her action when she filed her first complaint against State Farm in 2005. Finally, Offill contends that the trial court erred by not finding that the one-year limitations period in the insurance policy had been waived by State Farm’s actions.

Course of the Proceedings

In August of 2003, Geraldine Offill sustained a loss of personal property due to theft. On January 14, 2004, Offill sustained a loss of personal property due to a fire. On January 14, 2005, Offill commenced an action against State Farm. In her complaint, Offill alleged that State Farm breached a contract of insurance by failing to pay Offill for the losses of personal property she had incurred in 2003 and 2004. State Farm filed an answer to the complaint. On May 27, 2005, Offill filed a notice of voluntary dismissal without prejudice.

On March 7, 2011, Offill again commenced an action against State Farm, alleging that State Farm had breached a contract of insurance with Offill by failing to pay her for losses to her personal property she sustained in August of 2003 and January of 2004. State Farm filed an answer to Offill’s complaint and attached a copy of a renter’s insurance policy. State Farm raised a number of defenses in its answer, including Offill’s alleged failure to comply with the terms of the insurance policy. State Farm also filed a motion for judgment on the pleadings, contending that Offill failed to file her complaint against State Farm within one year after her losses to personal property were incurred, as required by the insurance policy. The provision of the insurance policy on which State Farm relied states: “Suit Against Us. No action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year after the date of loss or damage.”

Analysis

In isolation, any word or phrase in the contested policy language may be ambiguous. When considered as a whole, however, the private limitation of action provision in the State Farm policy is unambiguous. That the word “start” is not commonly used to indicate the commencement of a lawsuit does not mean that it refers to something else when it is used in a provision entitled “Suit Against Us.” Similarly, though the word “action” can refer to virtually anything done by a person, there is no reason to think it refers to anything other than a lawsuit when used as part of a two- sentence provision entitled “Suit Against Us.” The fact that the two sentences could have been written more clearly, and they could have, does not mean that they are ambiguous.

Negotiations with State Farm continued after the filing of the suit as well. It is therefore the position of Plaintiff that in the event that the language of the policy was not ambiguous that State Farm waived any one year filing requirement.

The trial court granted State Farm’s motion for judgment on the pleadings.

Offill Failed to Start Her Action Within One Year of Her Loss

Determination of a motion for judgment on the pleadings is restricted solely to the allegations in the pleadings and any writings attached to the complaint. Dismissal is appropriate when, after construing all material allegations in the complaint, along with all reasonable inferences drawn therefrom in favor of the non-moving party, the court finds that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief.

The Supreme Court of Ohio when faced with a virtually identical insurance policy provision, held that the insured must file a complaint against the insurer within one year of the loss that the insured suffered. Offill also contended that “even assuming that the one year period applied, the fact that the Appellee continued to negotiate after the expiration of the one year period constitutes waiver of the alleged limitations period. Offill only made this argument in the trial court in a footnote in her surreply in opposition to State Farm’s motion for judgment on the pleadings. Offill stated that she would seek leave to amend her complaint to make a corresponding allegation to support the waiver argument. However, there is nothing in the record reflecting that she sought leave to do so.

Consequently, there were no allegations in the pleadings of record to support Offill’s contention on appeal that there were negotiations beyond the one-year period after Offill sustained her losses to personal property. Based on the record, there was no error in the trial court’s decision granting State Farm’s motion for judgment on the pleadings.

If the Ohio Court of Appeal was to decline to apply the Supreme Court’s holding based solely on the fact that Offill filed an action in 2005 that she later voluntarily dismissed, then an insured could escape a one-year limitation in an insurance policy by the simple expedient of filing a complaint against the insurer within one year of the loss and then voluntarily dismissing the action, with the intent of re-filing the complaint any time within the remainder of the fifteen-year statute of limitations set forth in Ohio statutes of limitation.

ZALMA OPINION

The California Supreme Court, in 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) reached a similar result but tolled the private limitation of action provision by stating that the limitation period is tolled from the time the insured reports a claim until the insurer officially denies the claim. From the facts of this case Offill would still find her case barred.

Courts in different states apply the private limitation of action provision differently and it is incumbent and the insurer to ascertain how it is applied in the state where the loss occurred.

© 2013 – Barry Zalma

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

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

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

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

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Assumtion Of Risk — A Broad Defense

The Bumper Car Rule

I was personally almost strangled while riding on a bumper car because I put on the seat belt incorrectly and my then-teen-aged son was merciless as he drove his bumper car. Regardless, if I was injured I would not have sued my son nor the amusement park for my own stupidity and because inherent in the fun of a bumper car ride is the joy of bumping into the others riding the bumper cars.

Dr. Smriti Nalwaf, who fractured her wrist on a bumper car ride at an amusement park, sued the park owner for negligence in not configuring or operating the bumper car ride so as to prevent her injury. The superior court granted summary judgment for defendant on the basis of the primary assumption of risk doctrine, under which participants in and operators of certain activities have no duty of ordinary care to protect other participants from risks inherent in the activity. The Court of Appeal, concluding the doctrine did not apply to bumper car rides, reversed. The California Supreme Court was asked to resolve the issue in Smriti Nalwa v. Cedar Fair, L.P, No. S195031 (Cal. 12/31/2012).

FACTUAL BACKGROUND

On July 5, 2005, plaintiff, Dr. Smriti Nalwa, took her nine-year-old son and six-year-old daughter to Great America amusement park, owned and operated by defendant Cedar Fair, L.P. In the afternoon, plaintiff and her children went on the park’s Rue le Dodge bumper car ride.

The ride consisted of small, two-seat, electrically powered vehicles that moved around a flat surface. Each car was ringed with a rubber bumper and had a padded interior and seatbelts for both driver and passenger. The driver of each car controlled its steering and acceleration.

Plaintiff rode as a passenger in a bumper car her son drove, while her daughter drove a car by herself. Plaintiff’s son steered while plaintiff sat next to him in the bumper car; they bumped into several other cars during the course of the ride. Toward the end of the ride, plaintiff’s bumper car was bumped from the front and then from behind. Feeling a need to brace herself, plaintiff put her hand on the car’s “dashboard.” According to plaintiff’s son, “something like cracked” and plaintiff cried out, “Oh.” Plaintiff’s wrist was fractured.

In her operative complaint, plaintiff pleaded causes of action for common carrier liability, willful misconduct, strict products liability (in two counts) and negligence, but later dismissed the two products liability counts. The trial court granted defendant’s motion for summary judgment on the remaining causes of action, concluding the primary assumption of risk doctrine barred recovery for negligence because plaintiff’s injury arose from being bumped, a risk inherent in the activity of riding bumper cars. The Court of Appeal reversed in a divided decision, holding that the public policy of promoting safety at amusement parks precludes application of the primary assumption of risk doctrine, and the doctrine is inapplicable to bumper car rides in particular because that activity is “too benign” to be considered a “sport.”

DISCUSSION

Although persons generally owe a duty of due care not to cause an unreasonable risk of harm to others, some activities – and, specifically, many sports – are inherently dangerous. Imposing a duty to mitigate those inherent dangers could alter the nature of the activity or inhibit vigorous participation. The primary assumption of risk doctrine, a rule of limited duty, developed to avoid such a chilling effect. Where the doctrine applies to a recreational activity, operators, instructors and participants in the activity owe other participants only the duty not to act so as to increase the risk of injury over that inherent in the activity.

The primary assumption of risk doctrine is not limited to activities classified as sports, but applies as well to other recreational activities involving an inherent risk of injury to voluntary participants where the risk cannot be eliminated without altering the fundamental nature of the activity.

The primary assumption of risk doctrine rests on a straightforward policy foundation: the need to avoid chilling vigorous participation in or sponsorship of recreational activities by imposing a tort duty to eliminate or reduce the risks of harm inherent in those activities. It operates on the premise that imposing such a legal duty would work a basic alteration – or cause abandonment of the activity. Holding golfers liable for missed hits would only encourage lawsuits and deter players from enjoying the sport. The policy behind primary assumption of risk applies squarely to injuries from physical recreation, whether in sports or nonsport activities. Allowing voluntary participants in an active recreational pursuit to sue other participants or sponsors for failing to eliminate or mitigate the activity’s inherent risks would threaten the activity’s very existence and nature. While inherent risks exist, for example, in travel on the streets and highways and in many workplaces, active recreation, because it involves physical activity and is not essential to daily life, is particularly vulnerable to the chilling effects of potential tort liability for ordinary negligence. And participation in recreational activity, however valuable to one’s health and spirit, is voluntary in a manner employment and daily transportation are not.

The doctrine thus applies to bumper car collisions, regardless of whether or not one deems bumper cars a “sport.” Low-speed collisions between the padded, independently operated cars are inherent in – are the whole point of – a bumper car ride. As plaintiff agreed in her deposition: “The point of the bumper car is to bump – [¶] . . . [¶] You pretty much can’t have a bumper car unless you have bumps.” While not highly dangerous, such collisions, resulting in sudden changes in speed and direction, do carry an inherent risk of minor injuries, and this risk cannot be eliminated without changing the basic character of the activity.

Riders on Rue le Dodge are not passively carried or transported from one place to another. They actively engage in a game, trying to bump others or avoid being bumped themselves.

Any attempt on our part to distinguish between angles of collision that pose inherent risks and those that pose extrinsic risks would ignore the nature of a bumper car ride, an activity that gives its mostly young participants the opportunity to inflict and evade low-speed collisions from a variety of angles.

CONCLUSION

The risk of injuries from bumping was inherent in the Rue le Dodge ride, and under California  precedents defendant had no duty of ordinary care to prevent injuries from such an inherent risk of the activity. The absence of such a duty defeats plaintiff’s cause of action for negligence as a matter of law.

ZALMA OPINION

I understand that some people can’t take responsibility for their own actions and insist on suing for damages caused by their own stupidity. Smokers sue for injuries as a result of their use of “coffin nails”. Drunken patrons of bars sue for injuries they incur because the bar let them get drunk. People who are insured sue because the policy, that they never read, did not provide coverage for a loss neither they nor the insurer expected.

In this case the doctor sued because she was injured when her bumper car was struck by another. She did not sue the operator of the bumper car but sued the operator of the ride for not protecting her from being bumped by a bumper car in a bumper car game. Give me a break! It’s time to stop this type of stupidity and one can only wonder why it went to the California Supreme Court and why Justice Kennard wrote a stinging dissent.

Fortunately for the people of the state of California, and the insurance industry that insures the liability of businesses in the state, the majority ruled for the assumption of the risk doctrine to prevent liability in a case where the amusement activity is inherently dangerous and the danger is in the control of the riders not the park owner.

© 2013 – Barry Zalma

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

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

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

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

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“Public Policy” Can Rewrite an Insurance Policy

Bad Facts Make Bad Law

It has been axiomatic that an insurance company is entitled to determine for itself what risks it will accept and that 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. However, states have enacted mandatory insurance requirements that establish a public policy requiring insurers to provide coverage it is not willing to issue. In American Access Casualty Company v. Ana Reyes, Brigido Jasso, Individually and As Independent, 2012 IL App 120296 (Ill.App. Dist.2 12/28/2012) the Illinois Court of Appeal was asked to reverse the clear agreement made between an insured and an insurer and create insurance where it did not exist.

FACTS

The facts in this automobile-insurance-coverage case are undisputed. In September 2007, plaintiff, American Access Casualty Company, issued an automobile insurance policy to defendant Ana Reyes. The policy’s statement of declarations listed Reyes as the “named insured,” as well as the titleholder to the insured vehicle, a 1999 Chrysler 300M. However, in the policy’s section identifying the “operators” of the vehicle, the policy listed two persons: (1) Reyes, with the notation “EXCLUDED” instead of a driver’s license number; and (2) Jose M. Cazarez, with an “out of country/international” driver’s license number.  Further, Reyes executed an endorsement providing that plaintiff would not afford any coverage under the policy to any claim or suit that occurred as the result of Reyes operating any vehicle. Finally, the policy contained a provision excluding bodily-injury and property-damage liability coverage for “any automobile while in control of an excluded operator.”

On October 30, 2007 (one month after the above policy took effect), Reyes drove her car in Elgin and struck pedestrians Rocio and Sergio Jasso. Rocio was seriously injured and Sergio (a minor) died as a result of his injuries. Rocio and Sergio’s father, Brigido Jasso, sued Reyes, alleging negligence.

Thereafter, in response to the negligence suit, plaintiff filed the instant action, seeking a declaration that, because Reyes was driving at the time of the October 30, 2007, accident, its policy provided no coverage for and no duty to defend any claims and litigation arising therefrom. State Farm (which apparently provided uninsured motorist coverage to the pedestrians) answered plaintiff’s complaint and filed a counter-complaint for declaratory judgment, asking that plaintiff be estopped from excluding coverage for Reyes, because plaintiff’s attempt to “specifically exclude Ana Reyes the titleholder, payer on the insurance policy, [and] resid[ent] at the address of where the vehicle is garaged and located with full access to the vehicle is contrary to law and public policy and cannot be enforced. Ana Reyes’ exclusion would result in no one insured under the policy.”

TRIAL COURT DECISION

On October 20, 2011, the court granted plaintiff summary judgment on its complaint. On February 11, 2012, the court denied State Farm’s motion to reconsider, which raised, for the first time, an allegation that Cazarez is an illegal alien and contended that, by allowing him to be a member of her household, Reyes was in violation of federal law and, moreover, that plaintiff, by providing insurance coverage to Cazarez, was “harboring and shielding from detection an illegal alien.”

State Farm appeals, arguing that the insurance policy between plaintiff and Reyes violates public policy because it excludes Reyes, the only named insured and owner of the insured vehicle.

ANALYSIS

The primary issue presented is whether the exclusion of the only named insured and automobile owner from coverage as a driver under a liability insurance policy contravenes public policy. An insurance policy is a contract, and, therefore, the rules applicable to contract interpretation govern interpretation of an insurance policy.

The Illinois Safety and Family Financial Responsibility Law provides that “[n]o person shall operate, register or maintain registration of, and no owner shall permit another person to operate, register or maintain registration of, a motor vehicle designed to be used on a public highway unless the motor vehicle is covered by a liability insurance policy.”  The insurance mandated by the statute requires  that a motor vehicle owner’s “liability insurance” policy “[s]hall insure the person named therein and any other person using or responsible for the use of such motor vehicle or vehicles with the express or implied permission of the insured.” The statute mandates that a liability insurance policy insure the named insured and permissive users.

The Illinois legislature created the statute for the principal purpose to protect the public by securing payment of their damages. A private limiting agreement may not rewrite a statute that exists for the protection of the public. If the insurance provision conflicts with the law, it will be deemed void and the statute will continue to control.

However, just as public policy demands adherence to statutory requirements, it is in the public’s interest that persons not be unnecessarily restricted in their freedom to make their own contracts. Therefore, an appellate court must sparingly exercise the power to declare a private contract void as against public policy.

In the policy at issue here, Reyes is the the sole named insured. It was argued that Reyes is covered under the policy because it provides Reyes with uninsured-motorist, bodily-injury, property-damage, and medical-payment coverage in the event that she is injured in an accident in which she is not the driver. None of that equates to liability coverage. The policy exclusion operates to deny coverage when Reyes drives the vehicle. The Court of Appeal noted that contrary to the statute’s mandate, the liability insurance policy does not cover the named insured.

Named-driver exclusions have been upheld by Illinois courts and the courts of other states. Generally, public policy is not violated when a claimant must seek relief from his or her own uninsured motorist coverage because an exclusionary provision rendered uninsured the other vehicle. Although some appellate cases establish that named-driver exclusions are permissible, the Court of Appeal contends that they do not hold that a policy may completely exclude the sole named insured and automobile owner without running counter to the statute and, accordingly, public policy.

Insurers may, without running afoul of public policy, legitimately contract to limit the scope of their coverage. Insurers are not required to cover every possible loss and may legitimately limit their risks. Nowhere does the law expressly forbid parties to an insurance contract from excluding certain risks from liability coverage.

There is not a mere restriction or limitation on Reyes’ liability coverage: she has none. The provision constitutes a full exclusion of the named insured from liability coverage, as opposed to an exclusion of coverage only in limited circumstances specified in the insurance contract. The appellate court was not informed why plaintiff and Reyes contracted to exclude her from liability coverage. The reason for the exclusion, however, was irrelevant to its decision because, even if Reyes were excluded for a legitimate reason, the statute requires that the owner’s liability insurance policy cover the named insured and, here, coverage is not merely limited, but completely nonexistent.

The Court of Appeal concluded that there exists sound public policy reasons for requiring coverage over the sole named insured. The state’s interest in protecting the driving public far outweighs an insured’s desire to exclude himself from coverage in order to avail himself of a lower premium. To allow an insured to exclude himself from coverage and drive as an uninsured motorist, runs afoul of the overall purpose and intent of the compulsory insurance law.

The appellate court concluded it could not ignore the statute’s plain language that the liability policy must cover the person named as insured. Instead, it is the role of the legislature to specify, as it did with permissive drivers that named-driver exclusions may include the sole named insured.

The exclusion here is invalid because Reyes, the sole named insured, is not covered by liability insurance.

ZALMA OPINION

This case clearly takes away the unquestioned right of an insurer and insured to create a contract to which both agree. Ms. Reyes owned an automobile. She purchased insurance coverage that protected her from injuries any driver to whom she gave permission to drive her car might cause, it gave her uninsured motorist coverage if she was injured when not driving, and she received a reduction in premium because she agreed to be an excluded driver. She got what she bargained for.

Yet, because she drove the car knowing that she had no coverage she injured two people seriously. The state provided her with coverage for which she did not pay and which she did not ask to obtain.

The result of this decision is that anyone who owns a car but is not eligible for insurance will not be able to protect their investment in their automobile and will be unable to have a chauffeur operate her car. A 90-year-old quadriplegic, incompetent to drive a vehicle, that is owned cannot be insured because the insurer cannot exclude the 90-year-old  quadriplegic.

Public policy must make sense. This case does not make sense to me because it deprives both the named insured and the insurer from writing an insurance policy that makes sense for their needs.

© 2013 – Barry Zalma

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

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

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

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

This story is part of the E-book, “Heads I Win, Tail You Lose — 2011″ which is available as a continuing education course from A.D. Banker at http://adbanker.com or as an E-book for Zalma Books.

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Insurance Fraud Continues Into New Year

Continuing with the first issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the January 1, 2013 reports on how an incompetent arsonist obtained nothing from the effort to make money from an arson-for-profit; a discussion of immunity provided to insurers and their personnel as a result of reporting to the proper authorities that they suspected insurance fraud; a discussion of how insurance fraud professionals and insurance claims professionals are working to reduce the claims fraud statistics; and a report on why insurance fraud is the orphan child of the criminal justice system.

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

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

The last 10 of posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•    Happy New Year
•    Claims Made and Reported
•    Fraud By Third Party Should Not Be Considered by Arbitrator
•    Definitions in Policy Gives Word Special Meaning
•    Perjury in Bankruptcy Court Defeats Bad Faith Claim
•    Agreeing to Coverage Continuing After Loss Is Very Expensive
•    Insurance Only Pays Indemnity
•    Deceit Not Enough to Void Insurance in Oklahoma
•    Installment Fee Is Not A Premium
•    Only Insured Can Recover UIM Benefits

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

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

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

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

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

Barry Zalma, Zalma Insurance Consultants, ClaimSchool, Inc., and Barry Zalma, Inc. wish everyone a Happy and Prosperous New Year where the fight against insurance fraud is more successful than ever and fraud perpetrators are forced to give up their ill-gotten gains and spend time in the grey bar hotel.

© 2013 – Barry Zalma

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

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

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

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

This story is part of the E-book, “Heads I Win, Tail You Lose — 2011″ which is available as a continuing education course from A.D. Banker at http://adbanker.com or as an E-book for Zalma Books.

Posted in Zalma on Insurance | Leave a comment

Happy New Year

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. This is presented on Zalma on Insurance as gift for the New Year.

The Robin Hood Syndrome

No one could be more popular than a person who steals from the rich to give to the poor. Since the Robin Hood legend was first told in Medieval England, the noble thief is the most popular fantasy.

The public perceives insurers to be rich. Insurers build the towers downtown. Insurers are perceived to take premiums from poor policyholders and never pay claims. When someone steals from an insurer the public cheers. They want to believe the thief is like the noble Robin Hood stealing from the rich to give to the poor. Their dislike for the insurer who refused to pay for the damage to their house when an earthquake struck clouds their judgment.

An insurance criminal is as much a thief as the person who uses a gun to take cash out of the convenience store’s register. The insurance industry, and every person involved in it, must convince the public that Robin Hood is dead. The insurance criminal does not steal from rich, impersonal insurance companies. The insurance criminal steals from every person who buys insurance. Until the word gets out, the public will continue to make the fortunes of criminals. It is inevitable that the person we will call Robin Hood will continue to succeed. Crime against insurers pays well.

Robin was an affluent manufacturer of children’s clothing. He lived in Beverly Hills in a modest two million-dollar home without a mortgage. His line was popular. His personal income was never less than six figures and in many years exceeded seven. He was popular. He hosted a regular poker game at his house that attended by his wealthy neighbors. They always played nickel-dime poker and no one ever lost much money. They gathered for company and conversation.

One of the poker players was a lawyer who represented major corporations including insurance companies. During the poker game the lawyer could not relax. He seemed furious and whether he won or lost would slam his cards down on the table. Finally, one of the other players asked what was bothering him.

“The jury system is totally out of control” Coming from a lawyer they knew always tried cases before juries the statement was a shocking surprise. The players pressed the lawyer for more information. He said:

“Yesterday, a jury in Compton came in with a $30,000,000 verdict against one of my clients, Pay Fast Insurance. They asked me to see if the judgment can be set aside on appeal. I ’think it can, at least partially. Its ridiculous. The insured committed fraud. He had a legitimate burglary but he made claim for the theft of more items that could possibly fit in his house. The jury even agreed, they found that the claim he made was for twice what he lost. They still gave him punitive damages. The jury thought the insurance company gave the insured a hard time. It’s disgusting. They just want to punish all insurance companies even if they were right in rejecting the claim.

“I’m sure I can get the Court of Appeal to reduce the punitive damages since they’re so out of proportion with the actual loss. I might even get them to reverse the judgment. It doesn’t matter. Pay Fast is so scared now they are paying any claim presented to them.

They now pay the claims they know are fraudulent.”

The poker players commiserated with the lawyer and the game went on without further discussion. Robin remembered the conversation. This was a lottery he would like to enter. The odds were much better than that given by the State and he had inside information.

The next morning he called his insurance broker and told him to move his insurance from Fire Fighters Insurance to Pay Fast. He also doubled the limits of liability on contents because he had purchased some new antique furniture and art works. He did not, however, want the personal articles floater since he knew that would require an appraisal and an itemized schedule of the items. He then started collecting information on antiques and art with pages out of the Sotheby and Christie’s auction catalogues. When he gathered enough information, he instructed his secretary to prepare a list of items with the descriptions and prices taken directly out of the Sotheby and Christie’s catalogues. All the items listed were generic such as a Windsor chair or a Queen Anne desk. Paintings were never attributed to famous artists but rather to schools such as “the Venetian School circa 1500.” Nothing was specific. By the time his secretary finished the list totaled two million dollars. The amount was $100,000 less than the limits of liability stated on his new homeowners policy with Pay Fast Insurance Company.

Robin sent his wife and children for a week’s holiday at their condominium in Maui. He told them that he had a business meeting but would join them in a few days. His house was protected by a silent central station reporting alarm system. The alarm system, however, was only equipped with contacts on the doors and windows and a single motion detector that looked down the central hallway. He moved a grandfather clock directly in front of the motion detector making it ineffective.

In his backyard was a brick planter with a loose brick that he meant to have fixed months before. Early one afternoon Robin took the loose brick and carefully broke six window panes in the French door leading into the family room from the patio. All of the glass fell into the house. He climbed through the hole and ground the broken glass into his carpet. He went upstairs to the bedroom where his wife usually keeps her jewelry and opened each of the drawers dropping the clothes stored there on the floor. His personal office in the house had filing cabinets and he opened each cabinet and removed papers. He picked up the small fire safe and put it in the trunk of his Lexus. He then locked up his house and set the alarm knowing that the broken glass would have no effect. Robin drove to his office, installed the fire safe under his desk and worked until his normal quitting time. Since his wife was not home and there were no servants in the house he went to his club for dinner. He had dinner with a friend who was also temporarily a bachelor and arrived at his home about 10:00 p.m. punched the code calmly into his alarm keypad disarming his alarm and immediately dialed 911.

The Beverly Hills Police Department responded promptly and took a report of what appeared to be a burglary at Robin’s residence. He told the police that at the recommendation of his insurance agent he had prepared an inventory of all his household goods. He promised to provide them a copy of the list the next day. He informed the officer that it appeared that all of his antiques and fine arts had been stolen. The thieves left his normal household furniture, furnishings, television sets and stereo equipment. They obviously knew what they wanted and took only what they wanted. He reported that his wife had taken all her jewelry with her to Maui. He told them that the jewelry was not stolen. The fire safe he used to hold his important records, including all of his purchase records, was taken. Apparently the thieves thought there was something of value in the safe.

Pay Fast assigned one of its more senior adjusters to investigate the claim. He received from Robin the list of household goods whose total value was more than three million dollars. Of that list Robin had checked off the items of antiques and arts that never existed. He informed the adjuster that the items checked where the only items stolen. He also informed the adjuster that he intended to sue his alarm company. He was upset that they had not warned him about moving things in front of the motion detector. He believed that, but for their negligence, the burglary would not have succeeded. The adjuster reviewed the alarm company contract with Robin. He explained to Robin that the maximum damages Robin could recover was $250.00 because the contract had a liquidated damages clause. The adjuster told him that insurance companies have attempted to break this liquidated damages clause many times without success.

The adjuster asked for substantiation of the ownership of the items. Robin told the adjuster that most of the items were bought from private parties at estate sales. He kept all of his receipts and records in the safe that was stolen. He had no backup except the inventory his insurance agent had told him to make at the time he bought his policy from Pay Fast. Robin told the adjuster he was ready to sign a sworn statement that he owned all of the items on the inventory that they were stolen. He reminded the adjuster that his loss totaled almost two million dollars.

The adjuster was suspicious. The burglary was too neat. Too much was taken out of the small hole in the patio door. Robin was cool and calm and did not even seem upset that his privacy had been violated. The total lack of records was a major indicator of a potential fraud. The family taking a vacation on Maui while the husband and father remained home was another indicator of fraud. The disabling of the infrared detectors that were part of the alarm system by Robin, supposedly without his knowledge, made the adjuster extremely suspicious.

The adjuster took the list of antiques and fine art to well-known appraisers all of whom verified that if the descriptions were accurate the values stated were accurate. If anything, the values stated were low auction prices rather than a normal replacement value appraisals  for insurance purposes. The adjuster wanted to compel the insured to testify under oath. He believed that a skilled lawyer will destroy the insured’s story and establish the fraud. He presented his opinions to his claims manager. The claims manager was the same manager who made the decision to deny the fraudulent claim that resulted in the thirty million dollar verdict Robin learned about at the poker game. He knew, from the adjuster’s report and the recorded statement that the adjuster had taken from Robin there were at least three major indicators of a fraudulent claim. He knew that under the law Pay Fast had the right to compel the insured to appear for examination under oath. He was convinced the insured could not prove such a large loss. Photographs the adjuster had taken of the house showed no empty spaces. There were no shadows on the walls where paintings supposedly hung. There were no marks on the floor where furniture had supposedly sat before it was stolen.

The adjuster knew that Robin was a successful businessman. Robin made it clear he knew on a first name basis the mayor of Beverly Hills and played poker with a lawyer who often represented Pay Fast. He congratulated the adjuster on the thoroughness of his investigation. He informed the adjuster that the request for examination under oath would be proper but he could not recommend it unless compelled to do so by the home office. The claims manager informed the adjuster that he could not place Pay Fast Insurance Company in a position where it might find itself paying another thirty million dollars punitive damages judgment. The claims manager passed the adjuster’s report to his the Pay Fast home office with a recommendation that a proof of loss be issued and delivered to Robin for $1,950,000 and also recommended that Pay Fast pay the insured.
The Home Office, still tender about the punitive damages judgment and recognizing that eighty percent of the payment would be paid by their reinsurers, agreed with the claims manager. A proof of loss was issued and a check for $1,950,000 was placed in Robin’s hand the day he returned from his holiday on Maui.

When the adjuster delivered the check he was surprised to see that Robin was disappointed. He asked Why? Robin replied: “My neighbor told me about the thirty million dollar verdicts. I was hoping you would deny my claim so I could sue you for bad faith. I don’t need the money. I didn’t even like the antiques.”

Robin succeeded in insurance fraud. His plan, however, failed. If Pay Fast had exercised its rights under the policy, they would have denied the claim. He would have sued. There was a good chance that he could convince a jury that he was the original Robin Hood, the jury would give him his two million dollars plus multi millions in punitive damages to punish Pay Fast Insurance Company for its refusal to pay his obviously fraudulent claim. He didn’t win the big lottery but he won a small one. Robin robbed the rich insurer and all of its investors and enriched himself further.

Although disappointed, Robin took the settlement check and bought a four thousand square foot weekend house on a golf course in Palm Springs. He found insurance fraud much easier than working.

In about three or four years, after he no longer has to report the loss on an insurance application, some unsuspecting insurer will find itself in the same position as Pay Fast. Robin will make another fraudulent claim and hope, this time, that the insurer will reject it so that he will hit the big jackpot of punitive damages.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

This story is part of the E-book, “Heads I Win, Tail You Lose — 2011″ which is available as a continuing education course from A.D. Banker at http://adbanker.com or as an E-book for Zalma Books.

Posted in Zalma on Insurance | Leave a comment

Claims Made and Reported

Who’s On First

The Appellate Division of the Supreme Court, New York County dealt with an appeal of a judgment entered September 7, 2011, to the extent appealed from, declaring that plaintiff is obligated to defend and indemnify defendant in the underlying federal action, and dismissing the third-party complaint, unanimously modified, on the law, to vacate the dismissal of the third-party complaint and declare that third-party defendant is not obligated to defend or indemnify defendant in the underlying action, in Liberty Insurance Underwriters, Inc., Plaintiff-Appellant v. Perkins Eastman Architects, P.C., Defendant-Respondent., No. 8910 113946/06 590955/07 (N.Y.App.Div. 12/27/2012).

In compliance with the “claims made” policy issued to it by plaintiff, defendant timely advised plaintiff of a “Circumstance that may reasonably be expected to give rise to a Claim against [it]” and of the particulars of the potential claim. “Circumstance” is defined as “an event reported during the Policy Year from which you reasonably expect a Claim may be made.” In correspondence with plaintiff from 2004 to 2005, defendant identified specific problem areas, as well as delays and coordination issues, in the course of the subject nursing home construction project. It identified the owner, contractor, and contractor’s surety as potential claimants for millions of dollars. It noted that the owner was litigious, that the contractor was looking to deflect blame, and that negotiations with the surety over honoring its performance bond were proceeding slowly. Nowhere in any of the notices and letters to plaintiff did defendant limit the potential claim to design errors.

As to third-party defendant ACE’s “claims made and reported” policies, coverage for the federal action is barred by the exclusion for claims arising from circumstances required to be, but not, disclosed in defendant’s applications for insurance. Moreover, the federal action was a claim first made on November 3, 2005, during the second ACE policy period (February 16, 2005-February 16, 2006), but not reported to ACE before the end of that policy period. Although plaintiff disclaimed coverage on February 20, 2006, ACE did not receive notice of the federal action until March 31, 2006.

The “New York Amendatory” endorsement to the second ACE policy giving defendant an additional 60 days after February 16, 2006 to give notice of the claim does not avail defendant since, by its terms, it applies only if the policy terminates or is not renewed, neither of which occurred here. Nor did defendant establish detrimental reliance on any communications from ACE so as to estop ACE from denying coverage.

ZALMA OPINION

New York appellate courts are models of brevity. This case is a perfect example resolving a dispute over when a report of loss must be made to a claims made and reported policy.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Fraud By Third Party Should Not Be Considered by Arbitrator

Arbitration Award Stands

The Minnesota Court of Appeal was called upon to decide whether a trial court judgment vacating a no-fault arbitration award was proper in State Farm Insurance Companies, Petitioner v. Arecely Padilla, No. A12-0928 (Minn.App. 12/24/2012). Padilla argued that the trial court was mistaken when it concluded that the arbitrator refused to consider material evidence and exceeded his powers by finding that State Farm’s request for an examination under oath was not reasonable. Padilla also moved for sanctions against State Farm for improperly summarizing arbitration testimony to the appellate court and to the trial court.

FACTS

Padilla, age 17, suffered neck and back injuries while a passenger in her father’s truck. Her father was insured by respondent State Farm Insurance Companies. Appellant was treated by Metro Injury between August 2010 and July 2011. Billing statements show that she was seen 35 times and received a variety of services, such as chiropractic adjustment, massage, and other therapies.

Metro Injury began providing respondent with billing statements and records in September 2010, but State Farm did not pay the bills. State Farm believed that Metro Injury had a pattern of overbilling and overtreatment or of creating false or duplicative medical records. Padilla provided State Farm with her current medical records and information about medical providers she had consulted during the seven years before the accident. State Farm repeatedly asked appellant to submit to an examination under oath (EUO), but she refused to do so and instead filed a petition for no-fault arbitration.

Padilla later agreed to submit to an EUO, but rescinded that agreement after the Minnesota Supreme Court issued its opinion in W. Nat’l Ins. Co. v. Thompson, 797 N.W.2d 201 (2011). Instead, appellant’s attorney asked the no-fault arbitrator to rule on whether it was reasonable for respondent to require appellant to submit to an EUO.

Before the arbitration hearing, State Farm made an offer of proof to the arbitrator to produce copies of billing, diagnosis, and treatment records that showed Metro Injury’s treatment of other patients and that looked similar to appellant’s treatment plan. State Farm stipulated that it would produce these documents “if requested by the arbitrator and if an agreement is reached by the parties and the arbitrator that the materials will be submitted under seal and treated as confidential information. The information would need to be returned to [State Farm's] counsel at the conclusion of the arbitration proceeding.” The arbitrator requested additional information from respondent, but did not request copies of the documents described in the offer of proof. State Farm did not submit the proffered documents to the arbitrator.

At the arbitration hearing, appellant testified under oath and was cross-examined by respondent’s counsel. State Farm’s counsel acknowledged that appellant “provided her testimony in an honest and straightforward fashion…”

The arbitrator determined that it was not reasonable to require appellant to submit to an EUO, concluding that the purpose of no-fault arbitration was to “encourage ‘the voluntary exchange of information’ and discourage formal discovery.” The arbitrator acknowledged that appellant had a duty of cooperation, but stated that it was not reasonably necessary to require an EUO “from a minor claimant under the guise of conducting an ongoing investigation into the treatment and billing practices of Metro Injury.” The arbitrator also noted that despite respondent’s concerns about the necessity of medical treatment provided to Padilla, State Farm, deliberately chose not to take advantage of its rights to schedule an independent medical examination for Padilla. The arbitrator concluded that because State Farm deliberately chose not to schedule an independent medical examination of Padilla and found that it has failed to prove a reasonable necessity for requiring Padilla to submit to an EUO, the EUO was not needed.

Finally, the arbitrator noted that concerns over the accuracy of Padilla’s medical records could be dealt with on cross-examination and that respondent’s concerns about other insureds were not relevant to the question of appellant’s claim for medical benefits. The arbitrator awarded Padilla $7,406, plus interest of $752.90, out of her request for $8,440.

On State Farm’s motion to vacate the arbitration award, the district court concluded that the arbitrator refused to hear evidence material to the controversy and exceeded his powers by depriving respondent of its right to require an EUO. The district court vacated the arbitration award.

DECISION

Minnesota court rules and precedent hold that the trial court shall only vacate an arbitration award when:

(1)     The award was procured by corruption, fraud or other undue means;

(2)     There was evident partiality by an arbitrator appointed as a neutral or corruption in any of the arbitrators or misconduct prejudicing the rights of any party;

(3)     The arbitrators exceeded their powers;

(4)     The arbitrators refused to postpone the hearing upon sufficient cause being shown therefor or refused to hear evidence material to the controversy or otherwise so conducted the hearing, contrary to the provisions of section 572.12, as to prejudice substantially the rights of a party; or

(5)     There was no arbitration agreement and the issue was not adversely determined in proceedings under section 572.09 and the party did not participate in the arbitration hearing without raising objection.

The trial court concluded that the arbitrator refused to hear material evidence and exceeded his powers.

A no-fault arbitrator is limited to deciding questions of fact, leaving the interpretation of law to the courts. When an arbitrator must apply law to facts in order to grant relief, a court will review the arbitrator’s necessary legal determinations.  But an arbitrator’s findings of fact are conclusive. Neither a trial court nor an appellate court may review whether the record supports an arbitrator’s findings.

The question of whether an insured must submit to an EUO involves a determination of the reasonableness of the request. This is a question of fact for the arbitrator. The arbitrator’s finding that a request for an EUO is reasonable or unreasonable is conclusive.

The district court concluded that the arbitrator refused to hear material evidence because he declined respondent’s offer of proof of medical records of other Metro Injury patients. The arbitrator noted in his memorandum that information obtained from other insureds is irrelevant to Padilla’s claim for medical benefits. Since determination of relevancy is an inherent part of the arbitrator’s role as fact-finder courts must be wary about second-guessing the arbitrator’s factual findings.

Generally, evidence of fraud attributable to a person or entity not a party to the arbitration hearing is not material, and therefore not relevant, to the issue before the arbitrator. Since State Farm does not claim that Padilla was a party to any alleged fraudulent activity by Metro Injury the arbitrator correctly found that respondent’s evidence of Metro Injury’s billing or treatment practices with regard to other patients was not relevant to the narrow issues of whether appellant’s claim should be paid or whether it was reasonable to require her to submit to an EUO.

The trial court concluded that the arbitrator exceeded his powers because he

  1. denied respondent’s request for an EUO despite respondent’s demonstration that it acted in good faith and the EUO was a necessity; and
  2. interpreted the statute to require attendance at an independent medical examination (IME) before an EUO could be required.

In Minnesota, a no-fault arbitrator has at least the following powers:

  • to award, suspend, or deny no-fault benefits;
  • to conclusively find facts;
  • to determine the reasonableness of a request for an IME or EUO; and
  • to judge the relevancy or materiality of evidence submitted to the arbitration hearing.

The Court of Appeal concluded that the trial court improperly weighed facts when it concluded that the arbitrator exceeded his powers because State Farm acted in good faith, demonstrated the necessity to obtain needed information, and Padilla offered no reason for refusing to attend an EUO. It also found that the trial court was wrong when it concluded that the arbitrator exceeded his powers.

Padilla moved the Court of Appeal for sanctions. The purpose of the rule and statute is to deter improper conduct; by having a safe-harbor provision, the offending party is given an opportunity to correct the error. State Farm responded within the safe-harbor period and withdrew the offending material.

The appellate court reversed the trial court’s order vacating the arbitration award and remanded the case to the trial court for reinstatement of the arbitration award and declined to award Padilla sanctions.

ZALMA OPINION

Insurance fraud by medical providers is a serious problem. Billions of dollars are taken from insurers by fraud perpetrators. State Farm and other major insurers have found a way to put a dent into the amount of loss to fraud perpetrators by suing the medical practitioners and lawyers in civil court and even a few are prosecuted. For example, this month a federal jury ordered Pittsburgh attorneys Robert Peirce and Louis Raimond and radiologist Ray Harron to pay CSX more than $429,000, which could be tripled because they were convicted of civil racketeering charges. [For details see the January 1, 2013 issue of Zalma’s Insurance Fraud Letter when it is published at http://www.zalma.com/ZIFL-CURRENT.htm  

If Metro Injury was inflating bills and over treating patients like Ms. Padilla State Farm should, as did CSX, sue the perpetrators not the accident victim who was actually injured and who may have been over-treated without her knowledge. The evidence received at the arbitration may be of assistance, when added to the other information it had gathered, to prove the fraud against the perpetrator.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Definitions in Policy Gives Word Special Meaning

Liar, Liar, Pants on Fire

Illinois State Bar Association Mutual Insurance Company (ISBA) brought an action for declaratory judgment against its insured, Timothy J. Cavenagh, seeking a declaration that Cavenagh’s professional liability insurance policy did not require ISBA Mutual to defend Cavenagh against a claim brought by a fellow attorney, Richard Bogusz. In response, Cavenagh claimed that ISBA Mutual was required to defend Cavenagh against Bogusz’s complaint, and in a four-count counterclaim, he alleged breach of contract and tort claims based on ISBA Mutual’s refusal to defend. The circuit court dismissed the counterclaim and granted summary judgment in favor of ISBA Mutual, and in Illinois State Bar Association Mutual Insurance Company v. Timothy J. Cavenagh, 2012 IL App 111810 (Ill.App. Dist.1 12/20/2012), Cavenagh’s appeal was decided.

FACTS

The insurance coverage dispute began with a personal injury suit filed by Steven Spilotro against Ken Joniak and another defendant. Spilotro was represented by Timothy Cavenagh, and both defendants were represented by Richard Bogusz. That suit ended in a default judgment award of $900,000 against Joniak. The default judgment gave rise to a second suit: Joniak filed a malpractice claim against Bogusz, claiming that Bogusz failed to appear or adequately represent him. Bogusz asked his professional liability insurance carrier, ISBA Mutual, to defend against Joniak’s claims. ISBA Mutual assigned the law firm of Konicek and Dillon to defend Bogusz.

Bogusz later filed a third-party complaint against Cavenagh and Spilotro for fraud and conspiracy to commit fraud, alleging that Cavenagh had advanced Spilotro’s personal injury claim while misrepresenting the status of the suit to Bogusz to mislead him from taking further action to defend the case. Bogusz specifically alleged that Cavenagh, without revealing that a trial date had been set, told Bogusz that he did not plan to proceed with the case and that the case would settle for a small amount. Bogusz also alleged that Cavenagh and Spilotro misled the court to procure an inflated default judgment award. Bogusz further claimed that Cavenagh and Joniak agreed to file a malpractice suit so that Joniak could recover money to satisfy the judgment against him.

Cavenagh presented Bogusz’s third-party complaint to his malpractice insurer, ISBA Mutual, and requested representation. Cavenagh’s professional liability policy required ISBA Mutual to defend Cavenagh for any claim “aris[ing] out of a wrongful act.”

The policy also excluded from coverage any claim “arising out of any criminal, dishonest, fraudulent, or intentional act or omission committed by any of the INSURED.” After Cavenagh tendered his defense, ISBA Mutual refused to defend Cavenagh because, in ISBA Mutual’s view, the complaint did not allege a “wrongful act” as defined by the policy, and claims based on the insured’s fraudulent or intentional acts were specifically excluded from coverage.

The circuit court granted ISBA Mutual’s motion to dismiss the counterclaim and strike the affirmative defense. The court dismissed the breach of fiduciary duty and conspiracy counts with prejudice, but dismissed the breach of contract and section 155 counts with leave to amend. Cavenagh filed an amended counterclaim, which the circuit court later dismissed with prejudice.

ANALYSIS

To determine whether an insurer has a duty to defend the insured, the court must compare the allegations in the underlying complaint to the relevant provisions of the insurance policy. The policy required ISBA to defend any claim that “arises out of a wrongful act.” The policy defines “wrongful act” as “any actual or alleged negligent act, error or omission in the rendering of or failure to render PROFESSIONAL SERVICES, including PERSONAL INJURY committed by the INSURED in the course of rendering PROFESSIONAL SERVICES.” The policy also excludes coverage for any claim “arising out of any criminal, dishonest, fraudulent, or intentional act or omission committed by any of the INSURED.”

Where the policy specifically defines “wrongful act,” the appellate court is not allowed to search for other possible definitions in order to create an ambiguity where none exists.

The crux of Cavenagh’s claim is not that ISBA was wrong to deny coverage because the underlying complaint alleged negligent acts covered by the policy. Instead, Cavenagh argued that the complaint against Cavenagh was “obviously false and frivolous” and the allegations within it were “woefully deficient to support a claim of fraud.” As a general matter, when the underlying complaint alleges facts within or potentially within the policy’s coverage, the insurer’s duty to defend arises even if the allegations are groundless, false or fraudulent. Where the facts alleged, even if false or groundless, are not within or potentially within the policy’s language, the insurer has no duty to defend.

Having found that the policy did not impose a duty to defend against the Bogusz suit, the appellate court concluded that the circuit court properly granted summary judgment to ISBA Mutual and affirmed the dismissal of Cavenagh’s breach of contract counterclaim.

In this case, after ISBA Mutual refused to defend Cavenagh, it avoided any claim of estoppel by seeking a declaration that there was no coverage for the Bogusz suit.

In his affidavit, Cavenagh first argued that he could not intelligently respond to the motion for summary judgment without first obtaining documents and taking depositions regarding who made the decision to deny coverage and why and how the decision was reached. This is simply a restatement of Cavenagh’s failed discovery requests. We have explained above that the discovery Cavenagh sought was not relevant to ISBA Mutual’s obligation to defend under the policy.

Cavenagh also claimed that he needed additional discovery regarding a “discrepancy” between the language quoted in the summary judgment motion and the language contained in the policy first issued to Cavenagh.

CONCLUSION

Since there was no potential for coverage under the allegations of the complaint the circuit court’s order dismissing Cavenagh’s counterclaim and striking his affirmative defense of estoppel was affirmed and the court also affirmed the order granting summary judgment in favor of ISBA Mutual.

ZALMA OPINION

What this case teaches is the wisdom of defining terms in an insurance policy when it is necessary to make easy to read language concise and enforceable. In this case, the definition of “wrongful act” limited to its definition and removing any confusion with generally understood meanings of the same phrase.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

 

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Perjury in Bankruptcy Court Defeats Bad Faith Claim

Bankruptcy Fraud Is a Crime

Michael Martindale, and his wife, Velicia Martindale, appealed from an opinion and order entered by a trial court dismissing them from a bad faith claim they had filed against First National Ins. Co. of America, Safeco Ins. Co. of America and insurance adjuster Laura Harp (referred to collectively as “Safeco”). In Michael Martindale v. First National Ins. Co. of America, Safeco Ins. Co. of America, and, No. 2011-CA-001747-MR (Ky.App. 12/21/2012) the Kentucky Court of Appeal was asked to resolve a claim of bad faith claims handling in face of the bankrupts’ intentional, under oath, concealment of a pending bad faith suit.

FACTS

There was a motor vehicle accident in December 2000. Michael Martindale was driving south on Big Sink Pike in Woodford County while Mickey Taylor was attempting to pull out of a driveway on the east side of the road. In an attempt to avoid Taylor’s car, Michael ran off the west side of the road and sideswiped a fence before hitting a tree. The two vehicles did not collide. Velicia and the couple’s six-year-old daughter were passengers in the truck.

Michael, who was not wearing a seatbelt, sustained a lower back injury and was ultimately terminated from his job as an HVAC technician due to medical restrictions and inability to perform the job. Velicia sustained injuries to her mouth and ultimately underwent TMJ surgery. Their child was unharmed.

The Martindales tried to settle the personal injury case with Safeco, but could not reach an agreement and the case was tried by a jury. The jury found for the Martindales, apportioning 80% of the fault to Taylor and the remaining 20% to Michael. The jury awarded Michael $190,005.94 in damages, but also determined his injuries were 10% worse because he was not wearing a seatbelt. The jury awarded Velicia $67,752.68 for past medical expenses and past, present and future physical pain and suffering. Ultimately, Safeco paid the Martindales $185,804.97, from which $88,572.43 in attorney’s fees and costs were deducted.

Following the trial, in December 2004, the Martindales filed a bad faith complaint against Safeco alleging in part that it had:

[i]nstituted a war of attrition against the Martindales, both before and after suit was filed, filing numerous vexatious and frivolous motions and procedures that prolonged the litigation and cost the [Martindales] time and attorneys’ fees. During the litigation, [Safeco] refused to offer Michael any money as damages, effectively forcing a trial.

[Safeco's] conduct during the adjustment of the claims and in failing to make a reasonable settlement offer to the Martindales for the value of their claim was so violative of [Safeco's] duty to act in good faith that it shocks the conscience, and constitutes gross negligence and a reckless disregard of [the Martindale's] rights.

The complaint alleging bad faith is styled Michael Martindale, et. al. v. First National Insurance Co. of America, et.al., Woodford Circuit Court Case No. 04-CI-000317.

THE BANKRUPTCY FILING

Thereafter, the Martindales filed a voluntary Chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Kentucky. Question 4 of the petition required the listing of all “Suits and administrative proceedings, executions, garnishments and attachments,” and specifically directed the petitioner to “List all suits and administrative proceedings to which the debtor is or was a party within one year immediately preceding the filing of this bankruptcy case.” The Martindales checked the box titled “None,” and made no mention of the recently concluded personal injury suit; the sizeable jury award; nor the pending bad faith claim. The petition was signed under penalty of perjury.

On September 20, 2005, the Martindales were questioned on the record by Bankruptcy Trustee Rogan. When asked how they were supporting themselves, Velicia responded, “Student loans,” and Michael agreed. Although not reflected on the bankruptcy petition-it was divulged during the hearing that Velicia was working toward her master’s degree in accounting and Michael was attending a community college-together they owe about $56,000.00 in student loans. Rogan made it clear to the Martindales that the student loans were “non-dischargeable in bankruptcy” and directed their attorney to “amend the petition and list the student loans.” When asked whether they were owed money “for anything,” the Martindales both responded, “No.” At the conclusion of the hearing, Rogan concluded the bankruptcy was a no asset case.

On November 13, 2009, the Martindales filed an amendment to Schedules B and C of the bankruptcy petition to list the pending bad faith claim as an asset. Curiously, the amendment identified the pending bad faith claim with the case style and number assigned to the personal injury action. The same mistake was made on an amendment to the Statement of Financial Affairs filed the same date. There was still no mention of the personal injury case nor the jury award. The amendments were again signed by the Martindales under penalty of perjury.

ANALYSIS

The crux of this appeal is that in August 2010, Safeco moved to dismiss the Martindales from the bad faith claim on the grounds of judicial estoppel and to grant summary judgment against the bankruptcy estate because there were no genuine issues of material fact. The trial court entered an opinion and order granting Safeco its requested relief. Specifically, the trial court found the Martindales, despite opportunities to correct their pleadings, had committed fraud by concealing the tort litigation and jury award from the Bankruptcy Court and dismissed their bad faith claim under the doctrine of judicial estoppel which requires litigants to be consistent in their pleadings.

In evaluating the bad faith claim for purposes of the bankruptcy estate, the trial court concluded Safeco’s skepticism about the veracity of the Martindale claims resulted in a hard fought battle but did not rise to the level of proof required to succeed on a claim of bad faith.

The first question is whether the trial court correctly dismissed the Martindales from the bad faith case on the grounds of judicial estoppel due to their concealment from the Bankruptcy Court and Trustee of the personal injury lawsuit and resulting jury award. The Martindales claim they concealed nothing from the Bankruptcy Court and Trustee because the jury award had been dissipated by the time they filed the bankruptcy petition.

Judicial estoppel is an equitable remedy that binds a party by its fraudulent conduct in subsequent litigation arising from the same event. Here, the personal injury action, the bad faith claim and the bankruptcy petition all emanated from the same motor vehicle accident. The doctrine of judicial estoppel is intended to protect the integrity of the judicial process by keeping a party from taking inconsistent positions in judicial proceedings. The appellate court’s review of the bankruptcy petition and amendments revealed nothing specific about the underlying litigation sufficient to fully apprise the Bankruptcy Court and Trustee of the complete scenario. Even after reopening the case in October 2009 and filing amended schedules to mention the “possible bad faith claim,” the Martindales still did not provide wholly accurate details.

The Martindales maintain Safeco treated them so egregiously during the claims adjustment process that they violated Kentucky Bad Faith statutes. At most, the Martindales demonstrated a disparity in the jury’s award and Safeco’s offers-but such disparity alone is insufficient to establish bad faith. Even an insurance company’s erroneous evaluation of a case will not trigger an automatic finding of bad faith.

The Court of Appeal affirmed the trial court’s grant of summary judgment against Rogan because, if the Martindale’s bad faith claim were allowed to go forward, it was confident they could not prevail at trial for the same reasons.

ZALMA OPINION

The United States Code, 18 USC Sec. 157, provides:

A person who, having devised or intending to devise a scheme or artifice to defraud and for the purpose of executing or concealing such a scheme or artifice or attempting to do so – (1) files a petition under title 11, including a fraudulent involuntary petition under section 303 of such title; (2) files a document in a proceeding under title 11; or (3) makes a false or fraudulent representation, claim, or promise concerning or in relation to a proceeding under title 11, at any time before or after the filing of the petition, or in relation to a proceeding falsely asserted to be pending under such title, shall be fined under this title, imprisoned not more than 5 years, or both. (Emphasis added)

What I don’t understand, although I agree with the decision of the court, is why the trial court, defense counsel, or the appellate court did not refer this case to the U.S. Attorney for prosecution for violation of 18 USC Sec. 157. Not only did the Martindales succeed in obtaining a large judgment from SAFECO’s insured, they dragged SAFECO into a frivolous bad faith action and intentionally, willfully, and in total disregard for the law obtained a discharge in bankruptcy as a result of fraud.

The Martindales, if they truly committed bankruptcy fraud as the trial court concluded, are lucky that they are free to pursue their education rather than serve five years in the gray bar hotel.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

 

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Agreeing to Coverage Continuing After Loss Is Very Expensive

Insurers Who Make Coverage Generous Must Pay

In the 1960’s insurers had little concern over continuing losses like those cause by asbestos, pollution, contamination, etc., and, as a result were willing to give coverage for damages occurring after the expiration of a policy if the loss started in the policy year and continued to cause damage after. Most learned the lesson of the expense of continuing property damages or bodily injury and, as a result, limited the reach of their coverage. The old policies, that gave coverage for continuing losses, are still coming to trial and courts are forced by the litigants to decide the real meaning of the contracts of insurance.

On such case involved Olin Corporation (“Olin”) who appealed from a grant of summary judgment in favor of American Home Assurance Company (“American Home”) in the United States District Court for the Southern District of New York. Olin brought this action against its insurers, including American Home, regarding environmental contamination at Olin sites in the United States. The appeal arose from proceedings related to Olin’s Morgan Hill, California, manufacturing site. At issue is whether the $30.3 million attachment point for American Home’s excess policies for the years 1966-69 and 1969-72 could be reached by the alleged property damage at Morgan Hill in Olin Corporation v. American Home Assurance Company, No. 11-4055-cv (2d Cir. 12/19/2012).

BACKGROUND

The case began in 1984 when Olin brought a diversity action against its insurers seeking  indemnification for environmental damage at Olin manufacturing sites throughout the United  States. Because each site raised its own factual and legal issues, the district court addressed  coverage on a site-by-site basis. This appeal arises out of the most recent of these site-specific  proceedings, concerning contamination at Olin’s manufacturing site at Morgan Hill, California,  between 1957 and 1987.

Olin’s Morgan Hill Site

Olin began manufacturing signal flares at Morgan Hill, California, in 1956. Olin used the chemical potassium perchlorate (“perchlorate”) in the manufacturing process. As part of this process, perchlorate was combined with other chemicals by various means including the use of  cement mixers. This produced a large volume of perchlorate dust, which was dispersed throughout the site by wind and foot traffic. Perchlorate powder on the ground was then  dissolved by rainfall and carried via run-off into dry wells at the site, where it seeped into the ground, contaminating the water table below the site.

Throughout this period, the concentration of perchlorate in the water table below the site increased, generating an underground plume of perchlorate that gradually spread down the  valley. This underground plume reached equilibrium in 1987. By then, the plume extended approximately ten miles  from the site. Olin estimated that it would incur costs of more than $102 million to fully remedy the damage caused by the underground perchlorate plume.

The American Home Policies

Olin had an insurance program consisting of general commercial liability insurance and  layered excess policies. Two excess policies provided by American Home were involved in the Second Circuit decision. The first of these covers the period of  January 1, 1966, to January 1, 1969. The second covers the period of January 1, 1969, to January 1, 1972. Each policy covers ten percent of up to $10 million in damages in excess of $30.3  million for the three-year policy period. Thus American Home has no coverage obligation  unless the damages attributable to one of the policies exceed this $30.3 million attachment  point. Each policy also “follows form” to lower-level excess policies, which means that it  adopts their terms and conditions.

The Lloyd’s policy contained a Condition C:

Prior Insurance and Non-Cumulation of  Liability.” This provision, the principal subject of this appeal, states the following: It is agreed that if any loss covered hereunder is also covered in whole or in part under any other excess policy issued to the Assured prior to the inception date hereof, the limit of liability hereon . . . shall be reduced by any amounts due to the Assured on account of such loss under such prior insurance.

Subject to the foregoing paragraph and to all the other terms and conditions of this Policy, in the event that personal injury or property damage arising out of an occurrence covered hereunder is continuing at the time of termination of this Policy, Underwriters will continue to protect the Assured for Liability in respect of such personal injury or property damage without payment of additional premium. (Emphasis Added)

Proceedings Related to the Morgan Hill Site

Home moved for summary judgment, arguing that the $30.3 million attachment point was not reached  for either policy. American Home relied on the Second Circuit’s decision in Olin Corp. v. Insurance Co. of North  America, 221 F.3d 307 (2d Cir. 2000) (“Olin I”) which provides for pro rata allocation of damage in cases of progressive environmental injury. Under this approach, the  total $102 million in damages from the cleanup of the Morgan Hill site should be equally divided  among the years in which property damage occurred. And under our decision in Olin Corp. v. Certain Underwriters at Lloyd’s London, 468 F.3d 120 (2d Cir. 2006) (“Olin II”), property damage occurred from the time when contamination began until the time  when the underground plume of perchlorate reached its maximum extent. Assuming that  contamination began in 1957 and the plume reached equilibrium in 1987, property damage  occurred in thirty-one years. Pursuant to Olin I and Olin II, the total damage of $102 million  should be divided by 31, yielding a per-year damage figure of $3.3 million. Since each American Home policy had a coverage period of three years, the total property damage attributable to each policy from the perchlorate spill amounted to only $9.9 million.

Thus, the trial court found, neither policy’s attachment point of $30.3 million could be reached.

In Olin’s view, the second paragraph of Condition C requires American Home to indemnify Olin not only for damage occurring during the policy periods but also for any damage in subsequent years. This is because property damage arising from a “covered occurrence” was “continuing at the time of termination” of each policy, and thus American Home’s liability for the 1966-69 policy includes all damage from 1966 to 1987, and its liability for the 1969-72 policy includes all damage from 1969 to 1987.

DISCUSSION

Condition C appears in both of the relevant American Home policies through their following form with the underlying Lloyd’s policies. By virtue of its plain language, we see three requirements for the application of the continuing coverage provision. First, there must be “personal injury or property damage.” Second, this personal injury or property damage must “aris[e] out of an occurrence covered” by the policy. And third, this personal injury or property damage must be “continuing at the time of termination” of the policy. When these three conditions are met, the plain language of the provision requires the insurer to indemnify the insured for personal injury or property damage continuing after the termination of the policy.

Thirty years of constant perchlorate exposure on the same site through the same process caused property damage by the slow expansion of the plume satisfies the definition of “occurrence” for the purposes of applying other provisions of the  policy, it suffices for Condition C. The third requirement of Condition C is also met here: the property damage occurring during the policy period was clearly “continuing” at the time of termination of each policy.

The continuing coverage provision of the 1966-69 policy applies to all damage allocated to the years 1966 until the time when property damage ceases (here 1987). The same is true of the 1969-72 policy for the period of 1969-1987.

This honors the intent of the parties, because declining to enforce the continuing  coverage provision of Condition C while allocating damages pro rata may excuse high-level excess insurers from providing coverage paid for by their insureds. Allocating damages over a lengthy period typically results in attachment points for certain excess policies not being  reached. Condition C’s apparent purpose was to sweep a continuing loss into the earliest triggered policy, with that policy then fully indemnifying the insured for that loss. As a result, only one of the American Home policies here indemnifies Olin.

Based on this interpretation of the prior insurance provision, the most Olin can recover from the two American Home policies is the policy limit of one policy, $1 million. The record before the district court established that Olin did not have any insurance at the $30.3 million level until the 1966-69 policy. Because no prior policy exists from which Olin could recover damages in excess of $30.3 million, Olin’s recovery from the 1966-69 policy cannot be reduced by its recovery under any other policy. Since the 1966-69 policy is at the same $30.3 million level as the 1969-72 policy, though, any amount Olin recovers from the former reduces its recovery under the latter according to the terms of the prior insurance provision.

Proceedings on Remand

Condition C obligates American Home to indemnify Olin not only for property damage occurring during the policy period, but also for property damage arising from covered occurrences that continues after the policy period. Three decades of perchlorate exposure and the damage it created are treated as a single, multi-year occurrence for the purposes of this policy. Because this single, multi-year occurrence took place in part during each of the two policy periods here, the district court was incorrect to conclude that neither policy would be reached because of the allocation method.

On remand, American Home may demonstrate that these attachment points cannot be reached for other reasons. For example, this estimate of the years in which property damage occurred may be inaccurate. Or the evidence may permit the court to assign greater damage to the years before the inception of the two policies. We decide only that issues of material fact remain regarding American Home’s liability.

ZALMA OPINION

This decision is limited to policies that contain language equal to the “Condition C” considered by the court. In Condition C the insurers agreed to indemnify an insured from the date the pollution with perchlorate began and continued until it stabilized, a period of more than 20 years. In so doing the excess insurer was obligated to pay its $1 million limit if, on remand, the evidence supports it. If the other insurers in the excess pool also followed form and adopted Condition C Olin will be able to recover the full $10 million of that layer and layers above.

What this case teaches if that language of insurance policies are important, that excess insurers should seriously consider agreeing to follow form if they don’t intend to provide the coverages that the underlying insurance agreed to provide.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Insurance Only Pays Indemnity

Policy Wording Controls

Insureds who contended that the liability coverage provision in their homeowner’s policy required the insurer to defend a lawsuit brought by a contractor the insureds had hired to repair fire damage to their home and to remodel the home. The insurer’s motion for summary judgment was granted and the insureds appealed. In Dave’s Inc., An Idaho Corporation D/B/A v. D. Richard Linford and Lindsey, No. 39059-2011 (Idaho 12/20/2012) the Idaho Supreme Court was called upon to resolve the dispute and the attempt of a homeowners insured to make a fire insurance policy a guarantee of all work done and all costs incurred in the reconstruction regardless of the lack of wording or promises made by a State Farm policy.

FACTS

On January 17, 2007, the home of Richard and Lindsey Linford was damaged by fire. Their home was insured by State Farm Fire and Casualty Company, and they promptly submitted a claim under the policy. By letter dated January 19, 2007, a State Farm representative offered them three options for repairing their home, and the Linfords chose an option that entailed them hiring their own contractor to make the repairs. State Farm estimated the cost of the repairs to be $153,751.40, and it paid the Linfords that sum.

On March 20, 2007, the Linfords entered into a contract with a contractor to repair the home for the amount of State Farm’s estimate. On May 9, 2007, they entered into a separate contract to have the contractor remodel the undamaged part of their house. The remodel contract provided that the Linfords would pay the cost of material, the cost of subcontractors plus 20%, and labor at $50.00 per hour per man. State Farm increased its estimate of the cost to repair the home several times to the sum of $197,065.67, but the contractor contended that it was entitled to be paid more than the estimate.

On August 13, 2009, the contractor filed this action against the Linfords contending that it substantially completed the construction on April 25, 2008, and that the amount owing as of June 4, 2009, together with accrued interest, was the sum of $91,357.82 for both the fire damage and the remodel. The Linfords answered and filed a counterclaim against the contractor alleging that the contractor had agreed to repair the fire damage for $153,751.40 and that the Linfords had already paid $159,494.17. The Linfords also filed a third-party claim against State Farm alleging that it had failed to fully pay for the repairs to the house; that it was required to indemnify them for the expenses they incur in defending the contractor’s lawsuit; that it had breached the covenant of good faith and fair dealing; and that it had committed the tort of insurance bad faith.

Under Coverage A, the insurance policy insured the Linfords’ house against accidental direct physical loss. By written agreement dated June 2, 2010, the Linfords and State Farm agreed “to resolve and set the amount of loss under Coverage A of the Policy by appraisal.” A third party was mutually selected to conduct the appraisal, and on October 13, 2010, he submitted his determination that the replacement cost value of the fire damage was $205,757.63. By letter dated November 1, 2010, State Farm sent the Linfords a payment of $8,691.96, which was the difference between the appraisal and the amount already paid.

State Farm moved for partial summary judgment on the issues of duty to defend the contractor’s action against the Linfords and duty to indemnify them for any sums that the contractor may recover against them. After the matters were briefed and argued, the district court granted State Farm’s motions. It entered judgment in favor of State Farm dismissing the third-party claim with prejudice, and it certified that judgment as final.

The contractor’s cause of action against the Linfords was tried to the court. The court found that the contractor had made multiple estimates regarding the amount of its charges attributable to the fire renovation, but it had contractually agreed that the work would be done within the State Farm estimates. The court held that the third-party appraisal done pursuant to the agreement between the Linfords and State Farm established the amount due for the fire restoration. It concluded that the Linfords had paid the amount owing for the fire restoration in full, but they still owed the contractor $10,278.81, plus interest, under the remodel contract.

ANALYSIS

The Linfords argue on appeal that the district court erred in determining that State Farm had no duty to defend them against the contractor’s claims in this lawsuit. They contend that the duty to defend arose under the provisions of both Coverage A and Coverage L.

In order for the insurer to have a duty to defend, the insurance policy must provide that the insurer has a duty to defend the insured against the type of claim alleged.

State Farm points out in its brief that the Linfords did not argue in the district court that there was a duty to defend under Coverage A.

The district court ruled based upon the issues presented to it. Coverage L provides personal liability coverage, and it includes an obligation to provide a defense for a covered claim or lawsuit against the insured. The Linfords contend that the contractor’s lawsuit was brought against them “because of . . . property damage” covered by the insurance. They argue that but for the fire, they would not have engaged the contractor to repair the damage, and but for State Farm failing to pay the Linfords the sum claimed by the contractor for repairing the fire damage, the contractor would not have sued the Linfords.

First, the insurance policy expressly provides that the duty to defend under Coverage L only applies to a lawsuit against an insured “for damages because of bodily injury or property damage to which this coverage applies,” and the words “this coverage” obviously mean Coverage L. The policy expressly excludes the Linfords’ home from Coverage L. It states, “Coverage L does not apply to: . property damage to property owned by any insured.”

Second, the contractor’s lawsuit was not one to recover “for damages because of . . . property damage.” The lawsuit filed by the contractor sought to recover for the Linfords’ alleged breach of the contracts between them and the contractor, for the breach of the covenant of good faith and fair dealing implied in those contracts, and for unjust enrichment. There was no claim, even broadly read, that the Linfords damaged any property of the contractor.

Since there was no property damage or bodily injury to property other than that owned by the insured there could be no duty to defend and the trial court correctly concluded that State Farm owed no duty to defend the insured.

Determination of the amount of the loss did not have to await the outcome of the contractor’s lawsuit. The insurance contract did not purport to indemnify the Linfords from the claims of the contractor that they hired to repair the fire damage. The insurance contract specified the basis for determining the amount of the loss, and the Linfords were free to engage a contractor on different terms. The policy did not provide that State Farm was required to pay according to the terms of the contract negotiated between the Linfords and their contractor, nor did it require State Farm to pay whatever damages the contractor recovered against the Linfords up to the policy limits. The amount of the loss under the policy and the amount that the Linfords were required to pay their contractor could be two separate sums.

The Linfords entered into two separate contracts with the contractor, one to repair the fire damage and the other to remodel the house. After State Farm had paid the Linfords a total of $205,757.63 to settle the loss for the fire damage, they moved for summary judgment against the contractor.

State Farm sought an award of attorney fees on appeal pursuant to Idaho Code section 41- 1839(4), which provides that “attorney’s fees may be awarded by the court when it finds, from the facts presented to it that a case was brought, pursued or defended frivolously, unreasonably or without foundation.”

The Idaho Supreme Court concluded: “This appeal certainly qualifies. It was brought frivolously and without foundation.”

ZALMA OPINION

The Idaho Supreme Court saw through deceptive pleadings and arguments with unhappy insureds who hired their own contractor after agreeing with State Farm as to the amount of their fire loss sought to compel their contractor to do the work for State Farm’s figure and then added remodeling to the reconstruction. By working to obtain avoid paying the contractor what they owed him the insureds then sought to have their insurer pay. They failed because their arguments had no basis in the State Farm policy or the facts.

The attempt may have been creative but it had no basis in reality and was found to be clearly frivolous and without foundation. The greed of the insureds was turned over on them and they were required to pay the attorneys fees incurred by State Farm in defending the case and taking the case to the Supreme Court on Appeal.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Deceit Not Enough to Void Insurance in Oklahoma

Rescission Requires Factual Findings of Intentional Deceit

The Supreme Court of Oklahoma was called on to decide whether a misrepresentation on a life insurance application was sufficient to allow the insurer to void the policy. In Shannon M. Benson v. Leaders Life Insurance Company, 2012 OK 111 (Okla. 12/18/2012), the deceased clearly misrepresented or concealed material facts concerning his alcoholism. The widow and beneficiary claimed the misrepresentation and concealment were not intentional and that the insurer could have found the needed information had they gathered his medical records before they issued the policy.

FACTS

On March 24, 2005, Michael Todd Benson (Applicant) made an application to Leader Life for a $90,560.00 life insurance policy, naming his wife Shannon, as Beneficiary. The application asked if the applicant had ever been treated for liver disease, had any medical or surgical treatment in the last five years or any departure from good health and whether or not the applicant had ever had an alcohol or drug problem. Applicant answered yes to the departure from good health question and told the insurance company that he had a blood clot in his leg in October of 2003 and was treated by Dr. Mehran Shahsavari of Norman, Oklahoma. Applicant answered no to the Liver disease question and no to the alcohol question. When Leaders Life asked about the blood clot issue, Mr. Benson informed the insurance company that he had been treated for “deep vein thrombosis” and was prescribed Coumadin which he was no longer taking. Leaders Life accepted this answer and issued the underlying policy in this action.

On March 17, 2006, Applicant was on foot, pushing a stalled car out of the street when he was struck by another vehicle which eventually resulted in his death. Beneficiary filed for benefits under the policy. Leaders investigated the claim. They received the hospital records pertaining to his death, which also noted his blood alcohol at his time of death was .24 although the owner of the car testified that he smelled no alcohol on the applicant.

Michelle Houchin, the Underwriter and claims administrator for Leaders Life, investigated the claim. She ordered the records from the accident and from the 2003 treatment for the deep vein thrombosis. After reviewing the records she concluded that Mr. Benson had falsified his answers on his application and rescinded the policy due to Mr. Benson’s alcoholism. She testified that Leaders Life would rescind the policy even if the mistake was innocent. She further testified that the state of mind of the applicant was never considered. She also testified that alcohol played no part in Mr. Benson’s death and agreed that the policy application was ambiguous in her deposition but changed that testimony at trial saying it was not ambiguous. Ms. Houchin also did not follow Leaders Life internal policy and interview the agent who assisted Mr. Benson in filling out the application for the policy.

ANALYSIS

Oklahoma statutes, Section 3609 of Title 36, 2005 Supp. was the statutory law at time of the policy. It states as follows:

Representations in Applications–Recovery under policy–Mortgage guaranty policies

A. All statements and descriptions in any application for an insurance policy or in negotiations therefor, by or in behalf of the insured, shall be deemed to be representations and not warranties. Misrepresentations, omissions, concealment of facts, and incorrect statements shall not prevent a recovery under the policy unless:

1. Fraudulent; or

2. Material either to the acceptance of the risk, or to the hazard assumed by the insurer; or

3. The insurer in good faith would either not have issued the policy, or would not have issued a policy in as large an amount, or would not have provided coverage with respect to the hazard resulting in the loss, if the true facts had been made known to the insurer as required either by the application for the policy or otherwise.

B. Subsection A of this section shall not be applicable to mortgage guaranty insurance, as hereinafter defined. Misrepresentations, omissions, concealment of facts and incorrect statements shall not prevent a recovery under a policy of mortgage guaranty insurance unless material and fraudulent. As used herein, the term “mortgage guaranty insurance” means a form of casualty or surety insurance insuring lenders against financial loss by reason of nonpayment of principal, interest and other sums agreed to be paid under the terms of any note, bond or other evidence of indebtedness secured by a mortgage, deed of trust or other instrument constituting a lien or charge on real estate which contains a residential building or a building designed to be occupied for industrial or commercial purposes.

A “misrepresentation” in insurance is a statement as a fact of something which is untrue, and which the insured states with the knowledge that it is untrue and with an intent to deceive, or which he states positively as true without knowing it to be true, and which has a tendency to mislead, where such fact in either case is material to the risk. “Concealment of fact” was similarly defined as an intentional withholding of facts of which the insured has or should have knowledge, and the insured cannot be held to have concealed a fact of which he had no knowledge or which he had no duty or reason to know.

The Supreme Court, at least four times found a requirement of a finding of an “intent to deceive” the insurer before a policy may be avoided by reason of the insured’s false statement or omission in the application. In the present matter, the Insurer presented evidence to the jury that Mr. Benson lied on his application. However, the agent who assisted Mr. Benson noted that he was in a big hurry and didn’t even fill out the beneficiary portion of the application. She had to call him back and have him do it. Mr. Benson filed a medical release that was never used until his death and any questions of alcohol use would have been evident had the Insurer investigated this matter properly. The issue of intent to deceive was the primary focus of the entire trial. The underwriter testified that if Mr. Benson had indicated he had liver disease they would have obtained his medical records prior to issuing a policy, however, the deep vein thrombosis was not at any time given much weight and no medical records were ordered. She also stated that if alcohol use was marked on the application they would have sent out an alcohol questionnaire, and here no policy would have ever been issued. Contrary to the testimony about deceit, at trial the jury found for the beneficiary and against the insurer.

In an action at law, a jury verdict is conclusive as to all disputed facts and all conflicting statements, and where there is any competent evidence reasonably tending to support the verdict of the jury, an appellate court will not disturb the jury’s verdict or the trial court’s judgment based thereon.

At trial, Leaders Life made clear that they believed there were material misrepresentations made by Mr. Benson. They argued that insured had attempted to deceive them. However, the trier of fact, the jury did not find that such a misrepresentation had been made. The jury decided in favor of the beneficiary, Shannon Benson and awarded her $350,000.00 dollars in actual damages and $10,000.00 in punitive damages.

One dissenting justice disagreed with the majority and stated: “Mr. Benson was asked very specific and material questions on this life insurance application. It is undisputed that he did not answer those important questions truthfully. His estate should not benefit from this deception.”

The majority, however, justified their finding because Mr. Benson did not die from an alcohol related illness; he died by being hit by a car attempting to assist a stranded motorist. If he had ignored the stranded motorist, Mr. Willige, Mr. Benson would have not been struck and may still be alive and working today.

ZALMA OPINION

I, like the dissenting justice, find the decision of the Oklahoma Supreme Court disturbing. There is no question that Mr. Benson concealed material facts from his life insurer. The fact that he died from a result different from the disease that would have resulted – had he been truthful – a policy never would have been issued. Whether he died in a car accident or from liver disease his wife would have no life insurance on which to make claim. As a result of this finding Ms. Benson profited at the expense of the insurer and all those honest applicants whose premium was, and will be, increased to cover Mr. Benson’s life. No one should recover from an insurer as a result of deception.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Installment Fee Is Not A Premium

Installment Fees Not Premium

Many lawyers believe that a class action will be extremely profitable for the lawyers representing the class. This is especially so when the defendant is a major insurer with assets greater than many member nations of the United Nations. This was the situation faced by the California Court of Appeal in In Re Insurance Installment Fee Cases., No. D057138 (Cal.App. Dist.4 12/13/2012) where Plaintiffs in a tentatively certified class action against defendant State Farm Mutual Automobile Insurance Company (State Farm) appealed from a judgment of dismissal entered after the trial court sustained State Farm’s demurrer to plaintiffs’ fourth amended complaint (the complaint) without leave to amend.

The members of the putative plaintiff class are insureds of State Farm who pay the premiums on their automobile insurance policies in monthly installments. The plaintiffs alleged that State Farm unlawfully charges the class members a service charge (an installment fee) to cover its installment billing and collection costs without specifying the service charge as additional premium on its policies as required by California Insurance Code sections 381 and 383.5, and without obtaining prior approval from the Insurance Commissioner for that additional premium as required by section 1861.01 et seq.

State Farm also appealed a post-judgment order granting plaintiffs’ motion to tax costs of $713,463.72 that State Farm sought to shift to plaintiffs. State Farm incurred the costs in providing notice to putative class members that plaintiffs sought discovery of their contact information and installment fee payment information.

FACTUAL BACKGROUND

On appeal of a judgment of dismissal entered after the sustaining of a demurrer without leave to amend, an appellate court must accept as true all the material allegations of the complaint, reasonable inferences that can be drawn from those allegations, and facts that may properly be judicially noticed. However, the appellate court will not accept as true contentions, deductions, or conclusions of fact or law.

The representative plaintiffs and other State Farm policyholders who pay for their insurance in monthly installments are billed a service charge that is not included in the contract price specified in the policy.  Plaintiffs alleged that State Farm also includes those costs in the prices it charges for its policies, but does not disclose that fact to its customers. As a result, plaintiffs and the class members allegedly are charged twice for the installment billing and collection costs.

The premium for a State Farm policy is specified in the policy declarations page as the “Total Premium” due for the policy period. Plaintiffs allege the policy contemplates that the policyholder may pay the “Total Premium” in installments as long as the “Total Premium” is paid before the end of the current policy period. The installment fee at issue is not specified in the declarations page or anywhere else in the policy.

TRIAL COURT DECISION

In sustaining the demurrer without leave to amend as to the breach of contract cause of action, the court rejected plaintiffs’ argument that the language of State Farm’s policy itself (apart from the SFPP) allows for the payment of the premium in installments and ruled that the SFPP is not an illegal premium, but rather “pays for the convenience of paying monthly and covers a separate payment plan apart from the issuance of insurance coverage.”

ANALYSIS

It is commonly understood that a premium is the amount paid for certain insurance for a certain period of coverage. A premium is to be paid on commencement of the period of insurance coverage. An insurer is entitled to payment of the premium as soon as the subject matter insured is exposed to the peril insured against. State Farm’s fee is charged for making a true installment payment on the total premium owed for a six-month term of insurance coverage. The installment fee here is paid under a separate agreement (the SFPP) between the insured and State Farm for the benefit of being able to pay the total amount owed for a six-month period of insurance in monthly installments instead of in a single lump sum; it is not part of the amount paid for the six-month term of insurance coverage, as shown by the fact that a policyholder who pays the six-month premium in one lump sum does not pay the installment fee. Because the installment fee is consideration for a benefit separate from the insurance rather than an amount paid for certain insurance for a certain period of coverage it is not premium.

The Court of Appeal concluded that the SFPP agreement provides the insured a benefit separate from the insurance and is supported by consideration separate from the policy premium; it does not change the policy. Consequently, it was not required under terms of the policy to be made a part of the policy through an endorsement. State Farm’s charging the installment fee for that benefit under the separate SFPP agreement does not constitute a breach of the insurance contract.

Our determination that the complaint does not state a cause of action for breach of contract on any of the theories advanced by plaintiffs is also dispositive of plaintiffs’ cause of action for violation of the Unfair Competition Law (UCL).  Section 17200 of the UCL defines unfair competition as “‘any unlawful, unfair or fraudulent business act or practice . . . .'” Thus, there are three varieties of unfair competition under the statute: practices that are unlawful, unfair or fraudulent.

Plaintiffs claim under the “unlawful” prong of the UCL is premised on the theory that the installment fee in question is premium by failing to specify the installment fee as additional premium on the policy’s declaration page. The Court of Appeal concluded that there is nothing misleading or deceptive about State Farm’s charging the installment fee under the SFPP agreement.  It also concluded that State Farm’s charging the installment fee is a legal and proper business practice that does not violate the Insurance Code or any other statute and does not constitute a breach of the insurance contract with the policyholders who enter into the separate SFPP agreement. Requiring policyholders to pay the installment fee in exchange for the right to pay premiums in installments is not an unfair practice because it does not offend any established public policy, is not immoral, unethical, oppressive, unscrupulous, and is not substantially injurious to the policyholders who pay premiums in installments.

STATE FARM’S APPEAL

State Farm contends the trial court abused its discretion and violated State Farm’s right to due process under the federal and state constitutions by ordering State Farm to bear the costs of providing notice to putative class-member policyholders that plaintiffs sought discovery of their contact information and service charge payment information, and in granting plaintiffs’ postjudgment motion to tax those costs in the amount of $713,463.72.

When a party demands discovery involving significant “special attendant” costs beyond those typically involved in responding to routine discovery, the demanding party should bear those costs. The costs State Farm incurred in providing its policyholders notice of plaintiffs’ discovery demands were significant special attendant costs beyond those typically involved in responding to routine discovery, and they were necessary to the conduct of the litigation because the notice procedure State Farm used was required by law and court order. Therefore, it was an abuse of discretion to order State Farm to bear the costs of the notice procedure and not award those costs to State Farm as a prevailing party. Accordingly, the appellate court sent the case back to the trial court to determine the appropriate costs plaintiff must pay to State Farm.

ZALMA OPINION

Class actions have been very profitable for putative class representatives and the lawyers who bring class actions. What this case shows is that not all class actions are profitable and that some, like this one, can be quite expensive for the parties and lawyers involved.

State Farm, like many insurers, will allow their insureds who are unable to pay the full premium in a lump sum, to pay premium over time in exchange for an installment fee. Those plaintiffs who tried to get millions from State Farm may find that their efforts were for naught and will find that they must pay State Farm more than $700,000 in 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Only Insured Can Recover UIM Benefits

WHO’S ON FIRST?

Insurance is a contract of personal indemnity. It does not follow title to property but only insures the person(s) the insurer agrees to insured. Nicole Sparks, ignoring the general rule of personal indemnity, appealed an order of summary judgment dismissing her contract claim against Trustguard Insurance Company because she was not named as an insured nor did she qualify as an insured by the policy definitions. In Nicole R. Sparks Appellant v. Trustguard Insurance, No. 2011-CA-001119-MR (Ky.App. 12/14/2012) Sparks appealed claiming her and her friends intent created coverage for her.

FACTUAL HISTORY

On May 16, 2007, Shawn King applied for a policy of automobile insurance with Trustguard through Trustguard’s agent, Patton Chesnut Binder Insurance, Inc. (PCB). In his application, King listed himself as the sole, registered owner and driver of a 2002 Chevrolet Camaro, and as the sole applicant for the insurance; he also listed the Camaro’s vehicle identification number (VIN) on his application. That same day, Trustguard issued King a policy of insurance covering the Camaro, and the policy also included underinsured motorist (UIM) coverage. As it relates to UIM, the relevant terms of King’s policy provided:

Insuring Agreement

A. We will pay damages which an insured is legally entitled to recover from an uninsured motorist because of bodily injury:

1. Sustained by an insured; and

2. Caused by a motor vehicle accident. . . .

B. “Insured” as used in this endorsement means you or any family member.

Furthermore, the terms, “you,” and “your,” were defined in the general definitions section of King’s policy to “refer to the named insured, which includes the individual named on the Declarations page”-King-“or that person’s spouse if a resident of the same household.” “Family member” was defined as “a person related to you by blood, marriage or adoption and whose principal residence is at the location shown in the Declarations.”

On November 13, 2009, Nicole Sparks, who characterizes herself as King’s “longtime companion,” was injured in a motor vehicle accident while driving the Camaro described in King’s policy with Trustguard. Under the terms of King’s policy, Sparks was not a named insured, nor did she meet the definition of a “family member.” Nevertheless, Sparks sought UIM coverage from King’s policy owing largely to the uncontested fact that she, and not King, had always been the owner of the Camaro. Trustguard rejected her claim, and Sparks subsequently filed suit in Laurel Circuit Court to enforce King’s policy.

Aside from making a passing reference to “reformation” in her response to Trustguard’s motion for summary judgment, Sparks never sought to invoke the circuit court’s equitable power to reform the insurance policy; contract reformation requires proof of (1) mutual mistake or (2) mistake on the part of one party and fraud on the part of the other and Sparks did not allege fraud, mistake, or unfair dealing, or assert that evidence of those things existed. Instead, Sparks urged that public policy and various rules of contract interpretation operated to imply her into King’s insurance policy and its UIM coverage. Stated differently, Sparks simply sought to enforce King’s policy of insurance against Trustguard as it was written.

The circuit court summarily dismissed Sparks’ action and, in doing so, declined to impute Sparks into the coverage of King’s policy on any of the bases she presented.

ANALYSIS

Sparks does not contest that King’s insurance policy unambiguously excluded her from coverage, and has conceded the issue.

The “de facto insured” rule

In large part, Sparks bases this particular argument upon a direct quote and correct statement of the law from Meridian Mutual Ins. Co. v. Siddons, 451 S.W.2d 831, 833 (Ky. 1970): “Provisions required by statute are treated as being a part of the policy the same as if expressly written therein.”

Sparks argued that this should be read in conjunction with a Kentucky Statute that provides: “(1) No contract of insurance of property or of any interest in property or arising from property shall be enforceable as to the insurance except for the benefit of persons having an insurable interest in the things insured as at the time of the loss.¶ (2) “Insurable interest” as used in this section means any actual, lawful, and substantial economic interest in the safety or preservation of the subject of the insurance free from loss, destruction, or pecuniary damage or impairment. ¶ (3) When the name of a person intended to be insured is specified in the policy, such insurance can be applied only to his own proper interest. This section shall not apply to life, health or title insurance.”

Sparks contended that since she had an insurable interest in the Camaro, it was unnecessary for her name to be added to King’s insurance policy as a precondition to having UIM coverage under that policy. Kentucky law requires a person to have an insurable interest in the insured property both at the time of the making of the contract and at the time of the loss.  And, an insurance contract “is void from its inception” if an insurable interest does not exist at the time the contract for insurance was made. Because King had no insurable interest in the Camaro when he made his contract of insurance with Trustguard, his policy was void to the extent that it was based upon any kind of insurable interest in the Camaro. Additionally, UIM coverage (which is what Sparks is seeking under King’s policy) is personal to the insured – King – and is not connected to any particular vehicle. Consequently, Sparks cannot use her own insurable interest in the Camaro as a tool for imputing herself into King’s policy.

Estoppel

Sparks offers two arguments that, when taken liberally, appear to be theories of estoppel. Sparks argued that when King represented in his application for insurance with Trustguard that he owned the Camaro and supplied Trustguard with the VIN of the Camaro, it triggered an affirmative duty on the part of Trustguard to determine the true identity of the individual with the insurable interest on the Camaro and to add that individual to King’s policy or substitute that person instead of King.

The mere fact that King supplied Trustguard with the Camaro’s VIN while  representing in his application that he was the owner of the Camaro and the only person to be insured under the policy, can not be considered evidence that Trustguard had clear notice and full cognizance of the true facts. Trustguard was entitled to rely upon King’s representations.

Reasonable Expectations

“Reasonable expectations” are not ascertained from the subjective belief, however genuine, of the insurance applicant. The test in determining reasonable expectations is based on construing the policy language as a layman would understand it, rather than considering the policyholder’s subjective thought process regarding his policy.

Illusory Coverage

The doctrine of illusory coverage, like the doctrine of reasonable expectations, operates to qualify the general rule that courts will enforce an insurance contract as written. This interpretation theory rests on the principle that the insurer’s argument ‘proves too much.’ The language, if interpreted as proffered by the insurer, essentially denies the insured most if not all of a promised benefit.

Regardless of whether King would have ultimately been able to recover under all of the provisions of his insurance policy with Trustguard, his Trustguard policy contained nothing regarding Sparks. To the contrary, at all times, Sparks was unequivocally omitted from King’s policy; at no time and under no reading of King’s insurance policy did Trustguard ever expressly or implicitly promise to give Sparks any kind of coverage or allocate premiums to that effect; and, nothing in the policy reflects that Trustguard otherwise gave Sparks or King any reasonable ground for believing that it would ever give Sparks coverage.

Public Policy

Public policy does not favor discouraging an insurer from relying upon the knowing and voluntary representations of an insurance applicant. And, while Sparks contends in her brief that she and King never read the Trustguard policy in the years preceding her accident-a statement which their respective depositions contradict-public policy also does not favor allowing Sparks or King to use their purported ignorance of the Trustguard policy terms to their advantage.

ZALMA OPINION

Some insureds and their lawyers forget that the covenant of good faith and fair dealing falls equally upon both the insured and the insurer. When King lied on the application stating that he was the sole owner and operator of the Camaro when, in fact, it was owned by his girlfriend, Ms. Sparks, who was also the driver of the vehicle his lie was sufficient to allow the insurer to declare the policy void.

This case should never have gone to the court of appeal, it should never have been filed, it should have been thrown out because the policy was acquired by fraud and the claim was specious.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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No One Wants a Lawyer Who Is Nasty

Lawyer, Heal Thyself

Professionalism and civility is the foundation of the practice of law. Upon this foundation lays competency, honesty, dedication to the rule of law, passion, and humility. Every lawyer and every judge is charged with the duty to maintain the respect due to the courts and each other. The clients and the public expect it. The profession demands it. When counsel, in trial, fail to live up to the rules they harm their clients, themselves and the judicial process.

In a case where counsel acted less than professionally and where the trial and appellate courts stated their dissatisfaction and frustration with the behavior of counsel during the trial, particularly plaintiff’s counsel, the courts were forced to rule based on the law. After a jury returned a verdict for plaintiff in the amount of $1.75 million, the defendant appealed. In Jacqueline Wisner, M.D. and the South Bend Clinic, L.L.P v. Archie L. Laney, No. 71S03-1201-CT-7 (Ind. 12/12/2012) the Indiana Supreme Court was faced with two separate, but significant, matters.

ISSUES

The first issue required the Supreme Court to determine whether the trial court erred by denying defendants’ motion for a new trial based upon the cumulative effect of plaintiff’s counsel’s alleged unprofessional conduct during the trial. The second issue is whether the trial court erred when it refused to grant plaintiff prejudgment interest.

FACTS AND PROCEDURAL HISTORY

In 2001, Archie Laney was at work when she became dizzy, lightheaded, weak, and had difficulty walking. She was sixty-six-years old. Laney called her daughter, who drove her to the South Bend Clinic where Laney’s primary care physician worked. When they arrived, Laney learned that instead of her primary care physician being on duty, Dr. Jacqueline Wisner was on duty that evening. Dr. Wisner conducted an examination consisting of an oral history of Laney’s symptoms and an examination of Laney’s eyes, ears, lungs, and stomach. Dr. Wisner further conducted an Accu-Check blood glucose test, as well as a hemocue test for anemia. Dr. Wisner observed considerable wax build-up in Laney’s ears. Dr. Wisner diagnosed Laney with vertigo due to an inner ear infection, and discharged her with medication for the dizziness and an antibiotic. Dr. Wisner advised Laney the medication could take up to three days to work and instructed Laney to return to her primary care physician if the symptoms continued.

Two days later, Laney called her daughter and told her she could not move her right arm or right leg. Her daughter drove Laney to the Emergency Room at St. Joseph Medical Center. Laney was evaluated that evening and diagnosed as having suffered an ischemic stroke affecting the right side of her body. The stroke has rendered Laney unable to use her right side, thus Laney now struggles with independent living.

Laney filed a complaint with the St. Joseph Superior Court alleging negligence by Dr. Wisner and The South Bend Clinic on eleven different counts, generally relating to the failed diagnosis of a transient stroke, which later caused Laney to suffer a disabling stroke. The complaint also alleged that Dr. Wisner or the Clinic negligently failed to maintain the medical record from Laney’s March 9, 2001 visit to the Clinic.

On March 18, 2010, the trial court granted the motion to reduce the award and entered judgment in favor of Laney for the amount of $1.25 million, the maximum allowable under Indiana statutes and denied the motion for prejudgment interest.

The Court of Appeals affirmed the trial court’s order denying the motion to correct error, but reversed the trial court’s order denying prejudgment interest.

BEHAVIOR OF LANEY’S COUNSEL

Dr. Wisner and the clinic contend the behavior of plaintiff’s counsel was so unprofessional and so permeated the entire trial that it tainted the proceedings and therefore the cumulative effect was prejudicial enough to warrant a mistrial. When the motion is based on Indiana trial rules the appellant must show that (1) misconduct occurred; (2) the misconduct prevented the appellant from fully and fairly presenting the case at trial; and (3) the appellant has a meritorious defense. An abuse of discretion occurs if the trial court’s decision was against the logic and effect of the facts and circumstances before the court.

Dr. Wisner and the clinic argued that the trial court’s finding that Laney’s counsel in contempt of court on day three of the trial and instructing the jury to disregard certain statements made by Laney’s counsel were insufficient remedies that failed to undo the cumulative effect and prejudice caused by such conduct. For example, Laney’s attorney asked specific questions in front of the jury in violation of the trial court’s order not to broach a certain subject.

On the following day of trial, the trial judge held yet another side bar conference and warned plaintiff’s counsel that if he brought up that particular issue again during the next witnesses cross-examination a fine of $500 would be imposed for contempt of court. This example is one of many displays of inappropriate behavior of counsel. There were excessive objections by both counsel, over eighty by the defendant’s counsel and over thirty by plaintiff’s counsel. While objections are clearly permitted if made in good faith and on sound substantive grounds, repeated objections despite adverse rulings already made by the trial court are not appropriate. However, far more problematic for the trial judge in this case was the unnecessary sparring and outright contemptuous conduct of each attorney directed toward the other.

The record reveals at least five instances where the trial court judge had to admonish the attorneys about their behavior. Furthermore, by any conservative measure there were at least ten instances of questionable behavior by each attorney during the trial. Examples are bountiful throughout the record, but a few examples are highlighted below.

The Supreme Court reprinted multiple acts of childish behavior in the courtroom contumaciously to each other, the jury and the court. The Supreme Court then concluded that: “We hope this is not the way attorneys conduct themselves at trial. As specifically found by the trial court judge, ‘the trial was replete with improper behavior, in this judge’s opinion, by both attorneys.’ The trial court ultimately concluded there was no substantial prejudice resulting from counsel’s actions. The trial judge is in the best position to gauge the behavior of the attorneys and whether or not it impacts the jury and in what context.

Near the end of the trial, the trial judge even directed plaintiff’s counsel to apologize to the jury for personal comments about defendants’ counsel. Even during the subsequent hearing on the motion to correct error, some four months later, the lawyers could not behave civilly toward each other.

A jury trial is not a free-for-all. It is a civil forum in which advocates represent their clients before a panel of citizens, in front of a judicial officer who is responsible for enforcing the rules of procedure and rules of evidence and assuring the proper behavior of everyone in the courtroom. It is similar to an athletic event with two opposing teams competing and a referee observing to ensure all of the rules are followed. In this trial, both plaintiff’s counsel and defendants’ counsel committed fouls.

All attorneys in Indiana take an oath and each and every statement in the oath is sacred. One particular statement is, “I will abstain from offensive personality and advance no fact prejudicial to the honor or reputation of a party or witness, unless required by the justice of the cause with which I am charged.”

While the Supreme Court concluded that the judge did not abuse her discretion in denying the motion to correct error, but found itself compelled to nonetheless express its displeasure with the conduct of counsel, particularly that of plaintiff’s counsel.

The Supreme Court concluded that, although plaintiff’s counsel’s behavior was most troubling, both attorneys should have acted in a manner more becoming of their chosen profession. The duty to zealously represent our clients is not a license to be unprofessional. Here the trial court determined that the conduct of counsel did not prevent the jury from rendering a fair and just verdict and decided not to punish the the parties because of the conduct of their lawyers.

ZALMA OPINION

I stopped acting as a trial lawyer when it became clear to me that more and more lawyers considered litigation to be a combat to the death with none of the collegiality, courtesy and gentlemanly conduct that was the rule when I started practicing law back in 1972. Now, as an expert, I only rarely find that counsel attacks the expert personally.

I agree totally with the Indiana Supreme Court that the professionalism required of practicing lawyers is the foundation based in competency, honesty, dedication to the rule of law, passion, and humility. A lawyer that loses his or her temper, makes snide personal remarks about other counsel, witnesses or the court is not only a boor but has probably caused damage to his or her client as well as his or her reputation.

I would not wish to have representing me a lawyer who received such a serious chiding from the state supreme 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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A “House” is Not Always a “Home”

Insurers Need Not Define Every Policy Term

The Fifth Circuit Court of Appeal was asked to interpret a clause in an insurance policy which excludes coverage for the contents of a “rice drying house.” Hebert Farms filed a claim for losses under its policy with Southern Insurance Company (“Southern”) when its rice was damaged while in storage during the drying process. Southern denied the claim because its policy does not cover the contents of a rice drying house. In Hebert Farms v. Southern Insurance Company, No. 12-30649 (5th Cir. 12/12/2012) Hebert Farms brought siot against Southern. The district court found the term “rice drying house” unambiguously refers to an on-premise structure used for drying rice and granted summary judgment in favor of Southern. Hebert Farms appealed.

FACTS

Hebert Farms conducts a rice farming operation in St. Landry Parish, Louisiana. It owns five rice bins located on its premises. The rice bins are used for drying harvested rice and storing the rice until it is sold. The cylindrical bins consist of flat floors, pitched roofs, and walls. Each bin has two electric fans on it to circulate air into the bin for the purpose of “drying” or removing the moisture in the rice.

During an unknown date in the fall of 2009, after the rice crop had been harvested and placed into the rice bins for drying and storage, three of the electrical fans stopped operating. When this was discovered, Hebert Farms had the fans repaired by an electrician.

Hebert Farms contracted with Bunge Corporation to sell its rice crop for $13 per hundred weight. However, when the rice was delivered, it was rejected by Bunge Corporation because it was stained or “stack burned.” Staining diminishes the value of the rice and occurs when there is excessive moisture and heat in the rice such that the pigment in the rice hull bleeds and discolors the rice seed. Because the rice was stained, Hebert Farms had to sell the rice at a claimed loss of $238,348.71.

THE POLICY

Southern issued Farmowner’s Policy No. RRFR159941443 to Hebert Farms for the period of August 28, 2009 to August 28, 2010. The Coverage Schedule and Declarations portion of the policy describes “Coverage E – Farm Barns, Buildings, and Structures” as including “5 Grain Tanks.” The policy additionally provides, in relevant part: “Coverage F-Scheduled Farm Personal Property ‘We’ cover the classes or items of farm personal property for which a ‘limit’ is shown on the ‘declarations’. Coverage applies while property is on the ‘insured premises’. ¶ . . . . 7. Grain – When a ‘limit’ is shown on the ‘declarations’ for Grain, ‘we’ cover grain. This includes threshed beans, silage, ground feed, and manufactured and compounded stock foods in buildings, structures, sacks, wagons, or trucks.”

The policy also contained exclusions that stated the insurer does not cover: “5. the contents of a rice warehouse, rice drying house, cotton gin building belonging to a cotton gin plant or located on gin premises, or machinery, equipment, vehicles or implements that are part of these operations . . . .”

Hebert Farms sought coverage under Coverage E for “Farm Barns, Buildings, and Structures” – which lists “5 Grain Tanks” among covered property – and the “Perils” section of the policy, which covers “direct physical loss” to property covered under Coverage E.

Southern denied coverage on the grounds that the alleged loss is explicitly excluded by the “Property Not Covered Under Coverages E, F, or G” section of the policy which excludes the contents of a “rice drying house.”

ANALYSIS

Under Louisiana law, an insurance policy is a contract and should be construed according to the general rules of contract interpretation set forth in the Civil Code.

Herbert Farms argued the “rice drying house” provision cannot exclude coverage because the term is ambiguous and not defined by the policy. It also argued, because its “5 Grain Tanks” are specifically listed in the Coverage Schedule of the Declarations page as covered property, the policy cannot exclude these tanks from coverage in another section. Finally, Hebert Farms points to the fact that the rice drying bins are cylindrical in shape, and therefore they do not comport with what one would ordinarily consider a “house.”

While Southern acknowledges a “rice drying house” is not expressly defined by the policy, it argues the term should be given its ordinary prevailing meaning and cannot be construed to mean anything other than a structure where rice is dried. Southern argues the bins are structures existing for the purpose of drying rice, and under the policy, the contents of the bins – the rice itself – is expressly not covered.

While the term “rice drying house” is not expressly defined in the policy, the fact that a term is not defined in the policy itself does not alone make that term ambiguous. To construe this term, we must look to its plain, ordinary, and generally prevailing meaning and the ordinary meaning of “house” is simply a structure or building that houses something.

The “5 Grain Tanks,” as they are referred to elsewhere in the policy, are structures being used for housing rice while the rice is being dried; thus, under the plain and ordinary meaning of the words, the term “rice drying house” must mean “a structure where rice is dried.” Under the express language of the policy, though damage to the grain tanks themselves may be covered, when the grain tanks are used to store rice that is being dried, they are a “rice drying house” and the contents of the tanks – the rice itself – is not covered.

ZALMA OPINION

I have argued unto exhaustion that a court must read the entire policy before interpreting its true meaning. I have also suggested that insurers, to avoid claims of ambiguity, include in their policies definitions of any term that can be misconstrued. Of course, such an effort can be taken to an extreme since if every word used in the policy is defined the multiple definitions can create ambiguity.

In this case the Fifth Circuit used common sense and dictionary definitions to construe the meaning of the policy and that there was no reason to define the term “rice drying house” because it was clear that structures created to house and dry rice did not need an additional definition.

Insurers should, when drafting contracts of insurance, use as many terms with normal and easy to understand meaning. When special meanings are required that term must be defined.

Insureds, whose loss is denied will still sue but they will have a difficult time creating an ambiguity when none exists.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Incompetent Arsonist Gets Nothing

Only Fools Represent Themselves

In a case that proves that a party who represents herself has a fool for a client and an incompetent for a lawyer, Lori Meyers v. New Jersey Manufacturers Insurance Company, No. A-4585-10T2 (N.J.Super.App.Div. 12/11/2012) a homeowners insurer obtained a jury verdict in its favor after it denied the claim of Ms. Meyers after concluding she intentionally caused or caused someone to damage the property that was the subject of her claim. She filed an appeal in pro se, acting as her own lawyer.
Lori Meyers was the named insured on a homeowner’s insurance policy issued by defendant New Jersey Manufacturers Insurance Company (NJM). Following a five-day trial, a jury found in favor of defendant. Plaintiff appealed, acting as her own lawyer, from a judgment of no cause of action and a subsequent order denying her motion for a new trial.

The policy issued by NJM insured plaintiff’s single-family residence located on South Woodleigh Drive, Cherry Hill, New Jersey against loss caused by fire, smoke, theft, and vandalism or malicious mischief. The policy excluded coverage for any “intentional loss” defined as “any loss arising out of any act an insured commits or conspires to commit with the intent to cause a loss” putting in the policy wording the concept that all insurance losses must be fortuitous.

FACTUAL BACKGROUND

Plaintiff first attempted to sell her home in 2003, but her efforts were unsuccessful and she re-listed it in 2007. In June 2008, plaintiff entered into a contract for the sale of her home, and she also entered into an agreement which allowed the prospective purchasers to reside in the home prior to closing. The sale was contingent on the purchasers obtaining a mortgage. The sale fell through when the purchasers were unable to secure a mortgage, and they vacated the premises on December 12, 2008. Before moving out, they documented the condition of the house with photographs. Plaintiff inspected the property the next day and found no damage.

When plaintiff returned to her house on December 19, 2008, she testified that she “smelled the odor of natural gas” and found the interior damaged. Plaintiff immediately contacted the Cherry Hill Police Department. The police and firefighters that responded to the scene reported that “[n]o forced entry could be found to the home” and that “a fire had occurred in the basement closet containing the water heater.” In his crime scene report, Detective Jason Snyder stated:

[T]here was damage throughout the residence including a broken chandelier in the foyer, numerous holes in the walls and doors and numerous light fixtures were broken. Several broken light bulbs remained in the socket with the filaments intact without the outer glass covering. All of the cabinet doors in the main kitchen, basement kitchenette, bathrooms and laundry area were open with drawers pulled. There was debris from a small fire on the outside of the hearth of the fireplace in the first floor family room. . . . The fire on the hearth burned outside the protective metal screen where the smoke would not have directly traveled into the chimney. The fire appeared to have been intentionally set to cause damage to the residence and possibly facilitate a explosion of the residence once the residence was filled with natural gas.

Plaintiff hired John Philbin of the Citizen’s Public Adjusters to appraise the damage and submit an appraisal to NJM on her behalf. Philbin’s report indicated a total net loss of $118,072.72 due to vandalism. NJM hired T. Franek & Co., Inc. (Franek), a property and casualty insurance claim service, to perform adjusting services regarding plaintiff’s claim. Franek alleged that plaintiff’s appraisal included “everything that [was] wrong with the house regardless of how or what happened to make it that way.” Franek determined “a total loss amount of $34,291.61,” less plaintiff’s deductible of $1000, which resulted in a net loss of $33,291.61.

On or about February 9, 2009, Philbin forwarded plaintiff’s sworn statement in proof of loss to NJM, requesting payment of the “undisputed amount” of $33,291.61. However, in a letter dated February 19, 2009, NJM advised Philbin that plaintiff’s claim had been referred to its Special Investigations Unit and that the claim was “stayed” pending completion of the investigation.

Ultimately, NJM rejected plaintiff’s claim. Thereafter, plaintiff commenced this action alleging that NJM breached its policy by failing to pay for damages to the home, its contents, and her alternative living expenses.

Kevin Durling, a senior special investigator for NJM, testified that when he inspected the home, plaintiff stated she had contemplated upgrading “the doors from the flat panel hollow luan doors to raised panel doors.” Additionally, Durling observed that “every single door had holes in it.” According to Durling, plaintiff also said “that various realtors and people had suggested to her that different upgrades should be done in order to maximize her profits in selling the house.” Durling also testified there were “holes in the wallpapered walls” but the painted walls in the house were not damaged. Defendant’s attorney stated in her summation that plaintiff “padded her claim.”

The first question asked of the jury was: “Was the property [on] South Woodleigh Drive in Cherry Hill, New Jersey the subject of vandalism and/or arson and/or property theft causing damage or loss as a result of the conduct of a party other than the plaintiff?” The court instructed the jury that if it answered “no,” it should cease its deliberations and return its verdict. After deliberating for less than two hours, the jury answered “no” to question one by a vote of six to one.

On March 15, 2011, the trial court entered a judgment of no cause of action in favor of NJM and dismissed plaintiff’s complaint with prejudice. Following oral argument on April 1, 2011, the court denied plaintiff’s motion for a new trial, reasoning that, in fact, the evidence that was presented, based upon critically certain evaluations of credibility factors, indeed could have supported the judgment that the jury made in this case.

The essence of the jury’s conclusions concerning the extent of the loss was sufficient for the jury to conclude that plaintiff was not a truthful person in her presentation of information to the insurance company. That, coupled with the fact that the damage to this home, based upon the police officer’s testimony, resulted from a circumstance that reflected no forced entry to the home, could have created the circumstance that, though there was no direct testimony that plaintiff had herself vandalized the home or caused it to be vandalized, could have easily created for the jury a sense of utter disbelief about the entire circumstance of the alleged loss.

The appellate court concluded that after reviewing the record and the applicable law, the trial court’s decision on a motion for a new trial will not be reversed unless it clearly appears that there was a miscarriage of justice under the law. In this case, the trial court found there was substantial credible evidence to support the jury verdict.

ZALMA OPINION

The insurer should be commended for taking this case to trial even though the amount at issue was rather small. Insurance fraud, especially when committed in such an incompetent manner with multiple points of origin, with alleged vandalism clearly directed toward remodeling, and with a claim presented by a public insurance adjuster on behalf of the insured more than three times the actual damage created too many “red flags” of fraud to be ignored. Every fraudulent claim, regardless of the amount claimed, must be rejected entirely and if the fraud perpetrator has the gall to file suit, it should be defended with vigor as did the insurer in this case.

I do wonder, however, with so much evidence, why criminal charges were never filed against Ms. Meyers.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Florida Requires “Prejudice” to Defeat a Late Claim

Two Years Five Months Late May Be Okay

The Kings Bay Condominium Association, Inc. (“Kings Bay”) appealed a trial court’s final summary judgment in favor of its insurer Citizens Property Insurance Corporation (“CPI”). Kings Bay argued that the trial court erred in finding that the insured’s untimely notice of claim, served twenty-nine months after the alleged loss, barred its claim as a matter of law. In Kings Bay Condominium Association, Inc v. Citizens Property Insurance Corporation, No. 4D11-4819 (Fla.App. 12/12/2012) the Florida Court of Appeal reversed because the trial court failed to decide whether the insurer had be prejudiced by a delay of almost three years.

The appellate court noted that the trial court, reasonably, based its judgment on the following language from this court’s opinion in Kroener v. Florida Insurance Guaranty Ass’n, 63 So. 3d 914 (Fla. 4th DCA 2011) that held: “[A]s a matter of law, notice to the insurer of a claim of loss more than two years and two months after the loss occurred was not prompt notice; the untimely reporting of the loss violated the insurance policy and was sufficient to bar the claim.”

At the time the circuit court rendered its judgment, it did not have the benefit of the Florida Court of Appeal’s later opinions in Kramer v. State Farm Florida Insurance Co., 95 So. 3d 303 (Fla. 4th DCA 2012), and Soronson v. State Farm Florida Insurance Co., 96 So. 3d 949 (Fla. 4th DCA 2012). In both of those opinions, the appellate court held: “Despite the fact that a notice of loss and a sworn proof of loss are conditions precedent to suit . . . our supreme court long has held that such a condition can be avoided by a party alleging and showing that the insurance carrier was not prejudiced by noncompliance with the condition. In other words, if the insured breaches the notice provision, prejudice to the insurer will be presumed, but may be rebutted by a showing that the insurer has not been prejudiced by the lack of notice.”

Because of the circuit court’s reliance on Kroener before our clarification in Kramer and Soronson, the court did not engage in the prejudice analysis described in Bankers. Therefore, the appellate court had no choice but to remand for the court to reconsider the insurer’s motion for summary judgment and the insured’s response for that purpose.

ZALMA OPINION

Courts, including those in Florida, seem to take the obvious prejudice of a delay of almost three years, now insist that regardless of how late the report and proof of loss, the insurer must conduct a thorough investigation of the loss and be ready to present evidence to a court of substantial prejudice because of the delay.

For example, if during the three year delay, the insured had repaired damages multiple times, had put on a new roof, or had somehow destroyed all evidence that could be used by the insurer to determine the cause of loss, it can prove the prejudice rather than rely on the extent of the delay. When the claim is denied the insurer, to avoid the problem faced by the insurer in this case, should include in its denial of the claim details establishing the prejudice to its right to investigate and evaluate the extent of damage.

Forewarned is forearmed. Insurers cannot simply deny because of a two year delay. A thorough investigation must be completed, documented and the insured must be advised of the reasons for the prejudice.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Court Protects One to Detriment of All Others

Insurer Refused Right to Contract

Direct General Insurance Company (“DGI”) wrote an automobile liability insurance policy with a specific, agreed to, exclusion of a young driver living in the household. As a result of the exclusion the named insured’s premiums were not increased to cover the exposure faced by an insurer insuring a young or reckless driver. In Machon Lyons v. Direct General Insurance Company of Mississippi, No. 2011-CA-00896-COA (Miss.App. 12/11/2012) insurance coverage was sought to indemnify a person injured by the excluded driver who was operating a vehicle with the permission of its owner and the named insured.

Lyons sought a declaratory judgment against Direct General Insurance Company, asserting that an insured and his insurance carrier could not contractually exclude a family member from liability coverage under Mississippi’s mandatory liability insurance statutes contrary to the conclusion of the trial court.

FACTS

Lyons was in the passenger seat of Roderick Holliday’s car when it left the road and ran into a tree. Lyons was severely injured in the single-car accident and received a judgment against Holliday for $72,500. DGI was notified of Lyons’s suit prior to its filing.

Holliday was operating a Chevrolet Lumina, which his mother, Daisy Lang, had insured through DGI. DGI denied coverage because the policy specifically excluded Holliday from coverage. It is undisputed that Holliday lived with his mother and operated the Lumina with her permission.

Lyons then sued Direct seeking a declaration that the judgment against Holliday, which Direct had declined to defend, was covered under Lang’s policy.

DISCUSSION

Under section 63-15-4(2)(a) of the Mississippi Code Annotated (Supp. 2012), liability insurance is mandatory for vehicles operated in Mississippi. However, the statute is silent regarding named-driver exclusions.

Named-driver exclusions allow the insured to specifically exclude a designated person from liability coverage. This exclusion allows insureds to lower premiums by removing from their insurance teenagers or spouses who may have poor driving records. Ideally, after executing such an exclusion, the insured would not allow the designated person to operate the insured vehicle.

The Mississippi Court of Appeal concluded that some states’ statutes specifically approve named-driver exclusions, some have upheld named-driver exclusions reasoning that their respective statutes were not designed to protect insureds from claims that arise from the negligent use of their vehicles by excluded drivers, some have upheld such exclusions, but only for amounts above the statutory minimum coverage and one state has invalidated the named-driver exclusion altogether reasoning that the paramount purpose of the statute was to provide compensation to persons harmed by negligent motor-vehicle operation.

Reading the Mississippi statute the court noted that an insurer must pay damages if anyone operating a covered vehicle with the insured’s permission is found liable.

DGI argued that its named-driver exclusion is clear and unambiguous and must be enforced under settled principles of contract law. Mississippi law is settled that in the event of a conflict between the language of an automobile liability insurance policy and the statutory requirement, the statutory provisions are incorporated into and become a part of the policy.

In case law decided before our mandatory liability coverage, the omnibus clause was found to extend liability coverage to permittees and even second permittees through implied consent. The Court of Appeal reasoned that the Legislature intended to provide a minimum level of financial security to third parties who might suffer bodily injury or property damage from negligent drivers. As a result it concluded that the mandatory coverage requirements of a minimum of $25,000 for bodily injury to one person, $50,000 for bodily injury to two or more persons, and $25,000 for property damage. But above our statutory minimum coverage, an insurer and insured may agree to a named-driver exclusion.

The named-driver exclusions in Mississippi cannot defeat mandatory liability coverage for persons operating a covered vehicle with the permission of the insured, at least up to the statutorily required minimum coverage.

ZALMA  OPINION

This decision protected Lyon with insurance protection that Ms. Lang did not pay for since she agreed that her son would not be covered when driving her car. She took a chance and let him drive the car. The court stepped in and changed the wording of the policy to only exclude the son for amounts in excess of the statutory minimums.

Mr. Lyon will get paid. Every person who buys automobile insurance in Mississippi from now on will have to pay the additional premium required to cover an uninsurable driver who might be given permission to drive the vehicle. By so doing it deprives an insurer from its unquestioned right to select him or her that will be insured and will have the underwriting discrimination taken from insurers who will be forced to either charge too much for an auto policy or refuse to insure anyone with a young driver or one who has proved to be reckless and not a good risk.

This case is a perfect example of the law of unintended consequences. To get an insurer to pay $25,000 of a more than $70,000 judgment the court has cost hundreds of dollars a year to every auto insurance buyer in the state so that the extra risk can be covered by a sufficient premium.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Exception to Exclusion Controls

An Apartment Is Not A Condo

Ment Bros. Iron Works Co., Inc. (“Ment”) appealed from a judgment of the United States District Court for the Southern District of New York (Hellerstein, J.) granting summary judgment in favor of Interstate Fire & Casualty Co. in an insurance dispute. In Ment Bros. Iron Works Co., Inc v. Interstate Fire & Casualty Co, No. 11-2596 (2d Cir. 12/11/2012) a declaratory judgment action disputed Ment’s claim of liability insurance coverage for property damage alleged to have been caused by it, a welding subcontractor, during construction of a residential building at 40 Mercer Street in New York City. Forty Mercer was planned and marketed by the developer as a residential condominium, though no units had been sold at the time the damage occurred.

The commercial general liability coverage (with an aggregate limit of $2.25 million) excludes property damage “arising out of the construction of ‘residential properties,’ except ‘apartments.'” (emphasis added) “Residential properties” was defined to include condominiums. An apartment is defined as “a unit of residential real property in a multi-unit residential building or project where all units are owned by and titled to a single person or entity.”

The district court ruled that 40 Mercer was a “residential property” construction but not an “apartment” at the time the damage occurred – meaning that Ment had no coverage.

FACTS

WXIV/Broadway Grand Realty, LLC (“WXIV/Broadway”), a building owner and developer, began construction at 40 Mercer Street in 2005, using Pavarini McGovern, LLC (“Pavarini”) as general contractor. Pavarini subcontracted the welding to Ment. Ment completed its work between April 1 and July 2006. At the time, WXIV/Broadway was the sole fee owner of the building and project at 40 Mercer.

Thereafter, Pavarini discovered damage to the penthouse windows, allegedly caused by welding sparks. Pavarini sued Ment in New York state court. Ment called on Interstate to defend the suit and indemnify it. Interstate assigned counsel to defend, but soon reserved its rights on the ground that the damage had occurred during the construction of a condominium, citing the residential construction exclusion.

Ment filed a two-count complaint in the Southern District of New York seeking a declaration that Interstate had duties of defense and indemnity on the underlying Pavarini claim.

POLICY

The provisions at issue are contained in Endorsement ICB-6002 (12/04), entitled “RESIDENTIAL CONSTRUCTION 1 EXCLUSION WITH APARTMENT EXCEPTION.”  The critical wording of the exclusion and the exception (so labeled) is set out as follows:

This insurance does not apply to . . . “property damage” . . . arising out of the construction of “residential properties” [the exclusion], except “apartments” [the exception]. J.A. 87 (emphasis added). The exclusion and exception are followed by qualifying language, which applies to “apartments” that are converted to “condominiums”: In the event any “apartment” to which coverage under this policy applies is converted to a “condominium, . . . “, then coverage under this policy is excluded for any claims for . . . “property damage” arising out of, related to, caused by, or associated with, in whole or part, the construction of said “apartments” which occur after the conversion of the “apartment” into a “condominium, townhome or multi-family dwelling” [qualifying language].

ANALYSIS

Under New York law, which governs this dispute, an insurer bears the burden of proving that an exclusion applies. Generally, it is for the insured to establish coverage and for the insurer to prove that an exclusion in the policy applies to defeat coverage.  Once the insurer establishes that an exclusion applies, however, New York law has evolved to place the burden of proof on the insured to establish the applicability of an exception to the exclusion.

The New York approach to the interpretation of contracts of insurance, like many other states, is to give effect to the intent of the parties as expressed in the clear language of the contract.  Forty Mercer qualifies as a “residential property”  under the ordinary meaning of the term. Moreover, the term is defined in the contract to include properties such as single-family homes, townhomes, condominiums, or similar properties. In any event, the parties do not dispute that the 40 Mercer building was a new construction of a “residential property” at the time the damage occurred.

The harder question is whether Ment’s coverage is preserved nevertheless by the exception to the exclusion. Although coverage is excluded for “‘property damage’ . . . arising out of the construction of  ‘residential properties,'” there is the exception for “apartments,” which are defined as “a unit of residential real property in a multi-unit residential building or project where all units are owned by and titled to a single person or entity.” An  “apartment” is in that respect the opposite of a “condominium,” which is defined as “a unit of residential real property in a multi-unit residential building or project where each unit is separately owned and titled.”

The record is clear that, in 2006, 40 Mercer was an apartment building rather than a condominium. The sale deed in the record shows that in 2001, the property was sold by multiple owners to WXIV/Broadway alone. The documentation of the mortgage obtained by WXIV/Broadway in October 2005 clearly shows that WXIV/Broadway was the owner of the entire 40 Mercer property. There is no claim or evidence that any unit of the planned condominium had been transferred when Ment finished performing its welding subcontract in the summer of 2006.

Since 40 Mercer met the policy’s definition of  “apartment” at the relevant time, the Second Circuit concluded that Ment has sustained its burden to show that the apartment exception to the residential construction exclusion applies and that it is entitled to coverage on this loss.

The contract wording governs. Whatever the developer’s design or marketing plan, the wording of the exception to the exclusion, and the related  definitions, indicate that Ment was covered. Moreover, the qualifying language in the policy supports the view that an apartment is not a condominium until after conversion.

Although the language of the policy governs and settles the dispute, Interstate’s argument regarding ultimate intent is additionally unpersuasive because under New York law, a building does not become a condominium until a condominium declaration is filed.

WXIV/Broadway did not file a condominium declaration until February 9, 2007, after Ment had completed its work on 40 Mercer. WXIV/Broadway and everyone involved in the project may have intended and anticipated that 40 Mercer would become a condominium, but it was not a condominium under New York law until the declaration was filed in 7 February 2007.

Even if the apartment exception to the residential construction exclusion were ambiguous, any ambiguity must be construed against Interstate as drafter of standard contract wording. It follows that policy exclusions are given a strict and narrow construction, with any ambiguity resolved against the insurer. The same principle applies regardless of whether, as to a particular clause, the burden of proof falls on the insurer or the policyholder.

To the extent it matters, there would seem to be good reason why an insurer would draft wording to avoid coverage for residential units that are held by multiple owners. Although Interstate did not explain the purpose of the apartment exception to the residential construction exclusion, Ment suggested that its purpose is to provide coverage for contractors facing liability from a single building owner but not for contractors facing numerous potential suits from various individual residential owners.

ZALMA OPINION

As I have said again and again insurance policies that are clear and unambiguous must be applied by courts. If the insurer, Interstate, did not want to cover the risk of loss faced by Ment it could easily have eliminated the exception to apartments or added “unless the owner intends to convert the building to condominium.

They did not and therefore, since at the time of the loss the building was owned by a single person and was, therefore, by the policy definition and New York law, an apartment. Insurers must carefully write their policies and be prepared to live up to what they promised not what they wanted the policy wording to exclude.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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No Coverage for Loss From Use of a Firearm

 

CGL Means What It Says

The state if Washington appellate division was called upon to decide the application of a firearms exclusion in a commercial general liability (CGL) policy in Capitol Specialty Insurance Corporation v. Jbc Entertainment Holdings, Inc., D/B/A Jbc Entertainment, Inc, No. 68129-0-I (Wash.App.Div.1 12/10/2012). The exclusion denies coverage for bodily injury and property damage “that arises out of, relates to, is based upon, or attributable to the use of a firearm(s).”

FACTS

JBC Entertainment Holdings, Inc. (JBC) operates Jillian’s nightclub in Seattle. The CGL insurance policy JBC purchased from Capitol Specialty Insurance Corporation (Capitol) provided that “[w]e 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” subject to the firearms exclusion.

On March 21, 2010, an unknown person fired a gun at Jillian’s, injuring patron Jackson Jacob Mika. To recover damages related to the shooting, Mika filed a complaint against JBC, JBC employee Michael Knudsen, JBC owners/shareholders Gemini Investors and Alpha Capital Partners, Ltd., and non-employee event promoter Marquis Holmes. Mika asserted that JBC should have provided enhanced security “such as ‘wanding’ for firearms, given the large number of hip hop/rap patrons in order to keep the Plaintiff safe.” Mika’s claims included negligent hiring, training and supervision and negligent failure to provide adequate security. All claims relate to the shooting itself; Mika did not claim any negligence occurred after the shooting.

JBC, Alpha, Gemini, and Knudsen tendered the defense of Mika’s lawsuit to Capitol. Capitol agreed to defend under a reservation of rights and then filed this declaratory judgment action to determine whether the policy covered Mika’s claims. Capitol moved for summary judgment, arguing the firearms exclusion directly applies to all of Mika’s claims “[r]egardless of the ‘dressing up’ of the shooting into different negligence theories.”

The trial court granted Capitol’s motion, ruling that the firearms exclusion is binding, applicable and wholly precludes coverage for all claims, injuries and damages asserted by Jackson Jacob Mika. The appeal followed.

ANALYSIS

JBC contends Mika’s claims for negligent hiring, training, supervision and security allege a concurrent and independent cause of his injuries and therefore fall outside the firearms exclusion.  JBC’s alleged liability for negligence is wholly dependent upon the shooting, an occurrence that is specifically excluded from coverage.

The policy simply said: “This insurance does not apply to” an enumerated list, to which the parties added “‘[b]odily injury’ or ‘property damage’ that arises out of, relates to, is based upon or attributable to the use of a firearm(s).” The appellate court found that the language is unambiguous, and it unequivocally excludes coverage from bodily injury arising from the use of a firearm. To interpret the exclusion to apply only to the insured would be contrary to the plain language of the policy.

Capitol, in other parts of the policy, included “by or on behalf of the insured” language to narrow the scope of several other exclusions. For example, the fireworks exclusion pertains only to “‘[b]odily injury’ or ‘property damage’ that arises out of, relates to, is based upon, or attributable to: (a) the use, sale or possession of fireworks by, or on behalf of, any insured.” And the “excluded activities endorsement” which precludes coverage for bodily injury and property damage arising out of activities like tobogganing, flame shows, and mechanical bull rides expressly provides that “this exclusion only applies when the foregoing activities are performed with the knowledge or consent of” the insured, additional insured, or concessionaires using the premises of the insured.

Since the firearms exclusion contains no such limiting language, the appellate court concluded a reasonable consumer would give the firearms exclusion the literal reading its clear terms demand; the exclusion for any injury or damage that arises out of, relates to, is based upon, or attributable to the use of a firearm(s) has not been limited to use of a firearm by or on behalf of the insured.

CONCLUSION

The firearms exclusion in the CGL policy unambiguously excluded coverage for all claims arising from the shooting at the nightclub, including those characterized as pre-shooting negligence claims, regardless of who used the firearm.

ZALMA OPINION

This case teaches that when an insurer writes a clear, simple and easily understood exclusion it will be enforced. Language in an insurance policy will be interpreted to favor the insured unless the language – like that in the Capitol policy – is simple, clear and unambiguous.

It is time to write insurance policies without legalese or modifiers that cause confusion.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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“Arising Out Of” Means What it Says

Any Loss Arising Out of Asbestos Clearly Excluded

The Wisconsin Court of Appeal was asked by Michael D. Phillips, Perry A. Petta, and Walkers Point Marble Arcade, Inc. (collectively, “Phillips”) to reverse the trial court’s order granting declaratory/summary judgment to American Family Mutual Insurance Company (“American Family”).  Aquila Group, LLC, an entity owned by Daniel G. Parmelee (collectively, “Parmelee”) sold an apartment building to Phillips that was covered by the American Family policy. Phillips claimed, in Michael D. Phillips, Perry A. Petta v. Daniel G. Parmelee and Aquila Group, LLC, No. 2011AP2608 (Wis.App. 12/11/2012), that the trial court correctly determined that there was an initial grant of coverage, but erred in its determination that the asbestos exclusion found in American Family’s policy negated any insurance coverage for the damages sought in this suit and relieved American Family of the duty to defend.

Background

This case arises out of damages Phillips sustained as a result of the dispersal of asbestos in a twenty-unit apartment building that he purchased from Parmelee. Phillips sued Parmelee for breach of contract/warranty. Several months after Parmelee filed an answer, American Family filed a motion to intervene, bifurcate and stay the proceeding. In addition, it filed a counter-claim and cross-claim for declaratory judgment. American Family argued that while the business owners policy it issued to Parmelee covered the apartment building, due to exclusions listed in the policy it did not provide coverage for any damages sought by Phillips. After briefs and arguments by counsel, the trial court granted American Family’s motion to intervene and granted its motion for declaratory judgment concluding that American Family’s policy did not provide coverage to Parmelee due to the policy’s asbestos exclusion; and further, that American Family had no duty to defend Parmelee.

In his complaint, Phillips alleged that shortly after Parmelee purchased a twenty-unit apartment building in New London, Wisconsin, Parmelee decided to put the property back on the market for sale. Prior to purchasing the building, Parmelee had procured a building inspection and report. This report indicated that the building contained various defects. Included in the report was a statement by the inspector that “[t]here is probably asbestos in the basement heating supply ducts. … A professional abatement team should further investigate and mitigate the danger.”

In the course of negotiating the sale of the building to Phillips, Parmelee completed and signed a real estate condition report for the property. In this report, Parmelee indicated that he was not “aware of the presence of asbestos or asbestos-containing materials on the premises.” In addition, he indicated in the report that he was not “aware of a defect caused by unsafe concentrations of … other potentially hazardous or toxic substances on the premises.”

Parmelee accepted Phillips’ offer to purchase the apartment building for $419,000. Prior to accepting the offer to purchase, Phillips was given a copy of the aforementioned real estate condition report and Parmelee again represented in the offer to purchase that “as of the date of acceptance [he had] no notice or knowledge of conditions affecting the Property.”

Asbestos was discovered on the property when a contractor hired by Phillips attempted to remove some pipes. As a result, the building was contaminated with asbestos, and the tenants were required to leave. As a result of the discovery of the asbestos, Phillips suffered serious financial problems, which ultimately led to the foreclosure of this and other properties owned by Phillips.

In granting American Family’s motion, the trial court determined that the “negligence claim triggered an initial grant of coverage,” but the asbestos exclusion applied. Phillips’ appeal followed.

Analysis

When interpreting an insurance policy the court first examines the policy’s insuring agreement to determine whether it makes an initial grant of coverage for the plaintiff’s claim. If the claim triggers an initial grant of coverage the court must then determine whether any of the policy’s exclusions preclude coverage.

There was an initial grant of coverage.

Phillips contends that there is an initial grant of coverage under the policy’s language because the facts alleged in the complaint establish that there was both an “occurrence” and “property damage.” The facts alleged in the complaint and the deposition answers create the possibility of an accident. Because an occurrence is an accident, Phillips fulfills this policy’s definition.

The policy definition of “property damage” in the case before us includes “[l]oss of use of tangible property that is not physically injured.” Consequently, Phillips has fulfilled the requirements to establish both an “occurrence” and “property damage” and there is an initial grant of coverage.

The asbestos exclusion

The asbestos exclusion found in the policy reads, in pertinent part: “This insurance does not apply to … ‘property damage’ … with respect to: a. Any loss arising out of, resulting from, caused by, or contributed to in whole or in part by asbestos, exposure to asbestos, or the use of asbestos. … ‘Property damage’ also includes any claim for reduction in the value of real estate or personal property due to its contamination with asbestos in any form at any time. b. Any loss, cost, or expense arising out of or in any way related to any request, demand, order, or statutory or regulatory requirement that any insured or others identify, sample, test for, detect, monitor, clean up, remove, contain, treat, detoxify, neutralize, abate, dispose of, mitigate, destroy, or any way respond to or assess the presence of, or the effects of, asbestos. ….”

Phillips claimed the language was ambiguous. His attempt to create an ambiguity was unavailing. First, the Court of Appeal observed that the exclusion here is very broad. The opening sentence advises the insured that “any loss arising out of, resulting from, caused by, or contributed to, in whole or in part by asbestos, exposure to asbestos or the use of asbestos” is excluded. Given this language, the exclusion would include property damage caused by the accidental dispersal or the mere presence of asbestos.

A reasonable person reading the exclusion would not believe that the property damage had to arise out of the “exposure to” or “the use of asbestos” and not to “accidental dispersal or mere presence.” The comprehensive language used in the exclusion requires otherwise and the wording in the exclusion would not cause a reasonable insured to think that the exclusion only covers asbestos in its friable state. The reasonable insured would, in all likelihood, not know what “friable asbestos” is.

The Court of Appeal, therefore, agreed with American Family that “the policy language is clear that if any part of any loss is caused in any way by asbestos, the policy provides no coverage.”

The Court of Appeal noted that its conclusion was not novel; exclusions similar to that found in the American Family policy have been given effect in other jurisdictions. For example, in Pro-Tech Coatings, Inc. v. Union Standard Insurance Co., 897 S.W.2d 885, 891 (Tex. App. 1995);  Rolyn Cos., Inc. v. R & J Sales of Texas, Inc., 671 F. Supp. 2d 1314, 1331-32 (S.D. Fla. 2009); State Farm Fire & Casualty Co. v. Acuity, 2005 WI App 77, 280 Wis. 2d 624, 695 N.W.2d 883, where a Wisconsin court approved a pollution exclusion, stating that “[t]he phrase ‘arising out of’ is broad, general, and comprehensive,” and “means something more than direct or immediate cause such as originating from, growing out of, or flowing from.” Using that definition “arising out of,” it is clear that a reasonable insured would believe that any damages caused by asbestos in any number of ways was excluded from coverage.

The petition alleges negligence in the handling of material containing asbestos fibers and damages resulting from the mishandling of that material. The characterization of several different acts of negligence is of no consequence because each act relates to the asbestos exposure and nothing else. The same is true here – all damages are related to asbestos in some form. Consequently, there are no other damages beyond those arising out of the existence of asbestos in the building.

Finally, because the asbestos exclusion precludes coverage, the Court of Appeal had no reason to address the parties’ arguments concerning the application of the “total pollution” exclusion or the “expected or intended injury” exclusion.

ZALMA OPINION

Insurance is, and always has been, nothing more than a contract. When the terms and conditions of a policy are clear and unambiguous they must be applied and enforced. When a policy uses a phrase like “arising out of asbestos” it means nothing more than what it says. Phillips damages were caused as a result of asbestos contamination that he might have avoided had the person who sold him the property had advised him of the hazards. There is no question that person was either negligent or intentionally defrauded Phillips. Regardless, the damage arose out of asbestos and the exclusion applies and cannot be rewritten by a court after the loss.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Desire Doesn’t Change Policy Wording

No Ambiguity When Entire Policy Is Read

Insurance policies are not interpreted by their individual parts, phrases and sections but must be read as an entire contract. Even if a single provision of the policy seems ambiguous it is imperative to read the remainder of the contract to determine if an unambiguous meaning of the entire contract can be found. In Area Erectors, Inc., Corporation v. Travelers Property Casualty, 2012 IL App 111764 (Ill.App. Dist.1 12/07/2012) the Illinois Court of Appeal insisted on reading and interpreting an entire policy before making its decision.

FACTS

Plaintiff Area Erectors, Inc. (AEI), filed a complaint for declaratory judgment in the circuit court of Cook County, against defendant Travelers Property Casualty Company of America (Travelers), seeking a declaration that it is entitled to recover the replacement costs of its damaged property and seeking statutory penalties from Travelers for its vexatious refusal to settle its claim. At issue is the measure of the valuation of the property under the policy.

In its complaint for declaratory judgment, AEI alleged that an American 7150 crane it owned was damaged when an unexpected microburst storm came through a construction site and toppled concrete walls onto the crane. Two days later a Link-Belt crane owned by AEI was damaged in an unrelated incident when the boom hoist cable snapped and fell onto the manlift.

AEI is the insured under a commercial inland marine insurance policy issued by Travelers. AEI filed claims under the policy for the two damaged cranes. AEI argued it was entitled to recover the replacement cost for the loss of the American 7150 crane. Travelers argued AEI was entitled to recover the actual cash value of the equipment under the policy, a lesser sum than replacement cost.

Travelers determined the 7150 crane was a total loss. Travelers offered $379,868.75 in settlement of AEI’s claim on the American 7150 crane. This sum represented what Travelers calculated as the actual cash value of the crane less a $25,000 deductible. Travelers alleged it tendered the proper amount due under the policy, which is the actual cash value of the crane as specified under paragraphs A and B of the “‘Contractors Equipment’ Coinsurance and Valuation” endorsement.

Travelers filed an answer and affirmative defenses and a motion for judgment on the pleadings. In granting Travelers motion for judgment on the pleadings, the trial court determined that the actual cash value was the proper valuation under the policy.

ANALYSIS

Judgment on the pleadings is proper where the pleadings disclose no genuine issue of material fact and the movant is entitled to judgment as a matter of law. In ruling on a motion for judgment on the pleadings, the court must consider only those facts apparent from the face of the pleadings, judicial admissions in the record and matters subject to judicial notice.

THE POLICY

 Paragraph A of the endorsement establishes the minimum amount of insurance AEI was required to maintain on its equipment before a coinsurance penalty is incurred. Regardless of the age of the equipment, AEI was required to insure its property for at least 80% of its value to avoid the penalty in the event of a loss. The value of “listed” items less than five years old is the replacement cost. The value of listed items over five years old and unlisted items is the actual cash value. It is undisputed that both cranes were more than five years old at the time of the loss.

Paragraph B of the endorsement discusses the valuation of “Contractors Equipment” in the event of a loss. Paragraph B provides two formulas to calculate the value of lost property depending upon which of two valuations applies: “(1) Items to which Replacement Cost applies” and “(2) items to which Actual Cash Value applies.” AEI alleges that paragraph B does not provide guidelines for when replacement costs valuation applies or when actual cash value applies. AEI argued that the endorsement created an ambiguity that it asked the Court of Appeal to construe against Travelers.

When the entire “‘Contractors Equipment’ Coinsurance and Valuation” endorsement is read the Court of Appeal concluded that guidance was provided in paragraph A of the endorsement, which immediately precedes paragraph B. In the event of a loss, paragraph A requires AEI’s equipment to be insured for at least 80% of its value to avoid a coinsurance penalty. The value of “listed” items less than five years old is the replacement cost and the value for “listed” equipment more than five years old and “unlisted” items is the actual cash value.

There is nothing in the “‘Contractors Equipment’ Coinsurance and Valuation” endorsement that would reasonably lead to the conclusion that the provisions in paragraph A of the endorsement should be read in a vacuum and not considered when reading paragraph B of the very same endorsement.

If the court adopted AEI’s interpretation of the policy, the result would be the American 7150 crane would be valued at actual cash value for purposes of determining whether AEI carried the minimum amount of insurance to avoid the coinsurance penalty and valuing the same crane at replacement cost to determine the loss. To do so would be inequitable and when the policy is read as a whole, including paragraphs A and B of the “‘Contractor’s Equipment’ Coinsurance and Valuation,” the endorsement is not ambiguous and the actual cash value is the proper method of valuation for the damaged American 7150 crane.

Based on the record Travelers did not act in a vexatious and unreasonable manner in settling the claim on the American 7150 crane because a bona fide coverage dispute existed. According to the record, Travelers offered AEI the actual cash value of the American 7150 crane shortly after it was damaged. AEI responded by disputing whether the actual cash value was the proper method of valuation for the claim, claiming replacement cost is the proper method. This bona fide coverage dispute ultimately resulted in the instant action.

In approximately five weeks from the date the crane was damaged, Travelers informed AEI of its repair estimate and the amount it would pay under the policy. This is neither vexatious or unreasonable.

The record shows that Travelers responded in a reasonable time to AEI’s initial claim on the Link-Belt claim and a bona fide coverage dispute existed.

ZALMA OPINION

Every insured wants to recover full replacement cost after a loss occurs and to pay premium based upon actual cash value before a loss. The Travelers’ policy was willing to pay full replacement cost if an item of equipment was less than five years old and only actual cash value if the equipment is more than five years old. The obvious reason for different methods of valuation is that an old piece of equipment that could be replaced with a new piece of equipment creates a moral or morale hazard where it would be more profitable for the insured to place the equipment in a place where it could be damaged to profit from the insurance.

Travelers protected itself from the moral hazard by having two types of valuation. It did not, no matter how hard AEI argued, create an ambiguity it avoided the greed evidenced by AEI’s suit seeking to recover more than it agreed it could receive when it bought the policy.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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No Damages – No Coverage

Technicolor Clean Up Costs Not Covered

Several years ago, Thomson, Inc., acquired the assets of Technicolor, Inc., which included, among other things, three contaminated former film-processing sites. Eventually, local environmental authorities directed Thomson to remediate the contamination at the sites, an expensive and ongoing process for which Thomson seeks indemnification from Continental, who insured Technicolor from 1969 to 1974. Thomson asked the Indiana Court of Appeal in Thomson, Inc. N/K/A Technicolor USA, Inc., Technicolor, Inc., and v. Continental Casualty Co.; Travelers Casualty & Surety Co. & Travelers, No. 49A05-1201-PL-24 (Ind.App. 12/06/2012) to rule that the umbrella policy Continental issued to Technicolor covers losses resulting from orders from administrative agencies, as occurred here. Continental responded that its liability is limited to losses resulting from courtroom litigation.

After both parties moved for summary judgment on the question of whether coverage exists, the trial court ruled in Continental’s favor. Thomson Inc. (collectively, “Thomson”) now appeal from the trial court’s grant of summary judgment in favor or Appellee/Defendant Continental Casualty Co.

FACTS

Beginning in 1924, Consolidated Film Industries (“CFI”) operated a film-processing facility at 959 Seward Street in Hollywood, California. In February of 2000, Technicolor, Inc., of Hollywood, California, purchased CFI. In 2002, operations ceased at the Hollywood facility, and all nine buildings at the facility were demolished in 2005. Beginning in 1936, Technicolor Limited, a wholly-owned English subsidiary of Technicolor, Inc., operated a film-processing facility on Bath Road, West Drayton, United Kingdom. Beginning in 1964, Technicolor, Inc., operated a film-processing facility at 4050 Lankershim Boulevard in North Hollywood, California. In February of 2001, Thomson, Inc., acquired Technicolor, Inc., and Technicolor Limited, consequently also acquiring the three film-processing facilities.

Testing revealed chlorinated solvent contamination at the Hollywood, North Hollywood, and West Drayton facilities, with the addition of diesel fuel contamination at the North Hollywood site. In 2009, Thomson notified Continental that it had been required by local authorities to clean up the three sites. As of November 9, 2011, remediation had cost approximately $4,800,000 for the Hollywood site, over $1,000,000 for the West Drayton site, and approximately $730,000 for the North Hollywood site, although none had been completely cleaned up.

The Umbrella Policy

From 1969 to 1974, Continental issued three primary liability insurance policies to Technicolor, Inc. From August 15, 1969, to January 1, 1973, Continental also issued one umbrella policy,  (“the Umbrella Policy”), to Technicolor, Inc. Coverage B of the Umbrella Policy provides, in relevant part, that The company will indemnify the insured with respect to any occurrence not covered by underlying insurance, or with respect to damages not covered by underlying insurance but which results from an occurrence covered by underlying insurance, for ultimate net loss in excess of the insured’s retained limit “which the insured shall become obligated to pay as damages by reason of liability imposed upon the insured by law or assumed by the insured under any contract because of personal injury property damage, or advertising injury to which this coverage applies, caused by an occurrence.”

The insurer also agreed that with respect to an occurrence not covered in whole or in part by underlying insurance or to which there is no other insurance in any way applicable, shall have the right and duty “to defend any suit against the insured seeking damages on account of such personal injury, property damage or advertising injury, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted.”  “Ultimate net loss” was defined as “the sums paid as damages in settlement of a claim or in satisfaction of a judgment for which the insured is legally liable after making deductions for all other recoveries and also includes investigation, adjustment, appraisal, appeal and defense costs paid or incurred by the insured with respect to damages covered hereunder.” (Emphasis added)

THE SUIT

Thomson, although the damage was in California and the U.K., surprisingly filed suit in Marion County, Indiana Superior Court, seeking coverage from various insurance companies for remediation of the Hollywood, North Hollywood, and West Drayton sites. Thomson and Continental agreed that California law applied and then both moved for partial summary judgment against Continental, seeking a declaration of coverage for the remediation sites under Coverage B of the Umbrella Policy. On August 1, 2011, Continental cross-moved for summary judgment against Thomson, contending that under California law the Umbrella Policy did not cover costs and expenses Thomson incurred “to respond to administrative directives to remedy environmental contamination[.]”

The trial court granted Continental’s summary judgment motion and denied Thomson’s as to all three remediation sites.

DISCUSSION AND DECISION

Thomson concedes that there is no coverage under the primary liability policies Technicolor, Inc., had with Continental from 1969 to 1974. Thomson argues, however, that coverage exists under the Umbrella Policy. Specifically, Thomson contended that the language of Coverage B and the Umbrella Policy’s definition of “ultimate net loss” provide coverage.

The Indiana Court of Appeal recognized that the fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. Such intent is to be inferred, if possible, solely from the written provisions of the contract and if contractual language is clear and explicit, it governs.

Under California insurance law, as it relates to commercial general liability policies, “damages” are limited to losses resulting from a “suit,” which is understood to refer, in general, to courtroom litigation. The duty to defend a “suit” seeking “damages” under pre-1986 CGL policies is restricted to civil actions prosecuted in a court, initiated by the filing of a complaint, and does not include claims, which can denote proceedings conducted by administrative agencies under environmental statutes. Likewise, the duty to indemnify for all sums that the insured becomes legally obligated to pay as damages.  Consequently, unless the Umbrella Policy provides coverage for proceedings beyond “suits” or for indemnity for losses beyond “damages,” there is no coverage under California law.

The Court of Appeal found that a California decision concluded that coverage did not extend beyond “damages,” observing that the coverage clause imposing the duty to indemnify is clear in its limitation to court-rendered damages. The coverage clause in the Umbrella Policy provides that “[t]he company will indemnify the insured ‘for ultimate net loss’ which the insured shall become obligated to pay as damages.” The coverage clause in the Umbrella Policy limits “ultimate net loss” to “damages.”

The Umbrella Policy’s definition of “ultimate net loss” is also explicitly limited to “damages.”

The Umbrella Policy limits Continental’s indemnity obligations to “damages.” Consequently, the Court of Appeal concluded that Continental has no obligation to indemnify Thomson for the remediation of the Hollywood, North Hollywood, and West Drayton sites as a matter of law.

ZALMA OPINION

This decision is proof that “new and improved” is not always better. There is no coverage for clean-up orders without court judgment or damages if coverage is sought from a pre-1986 policy and is available if sought from a post-1986 policy. Since there was no suit and no damages found by court judgment there is no coverage for defense or indemnity.

Although Thompson filed in Indiana, rather than California or the U.K., where the damages were, it gained no advantage because the court applied California law.

This case teaches it is best to read and analyze an insurance policy in accordance with the law of the jurisdiction before filing suit.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

 

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INSURERS SUE FRAUD PERPETRATORS

Insurers Proactive Against Fraud

The best defense in battle has always been a strong offence. In litigation the same is true. Insurers have, for decades been passive victims of insurance fraud, considering it to be a cost of doing business. Premiums were increased to cover the extra cost of paying fraudulent claims. Some insurers learned that once insurance criminals learned that they would pay fraudulent claims that the number of fraudulent claims increased exponentially and they could not increase premiums fast enough to cover their losses to fraud. Those insurers became proactive in their efforts against fraud.

In The People Ex Rel. Fire Insurance Exchange et al v. Neil R. Anapol et al, No. B233521 (Cal.App. Dist.2 12/06/2012) the Fire Insurance Exchange and Mid Century Insurance Company (collectively Farmers) uncovered what it believed to be a massive insurance fraud ring engaged in the submission of false and/or inflated claims for smoke and ash damage arising from several Southern California wildfires. It brought a qui tam action against several members of the alleged ring, including two attorneys, Neil R. Anapol and Robert B. Amidon, who submitted the purportedly false insurance claims on the part of Farmers’s insureds. As against the attorneys, Farmers alleged both the submission of false claims and the use of cappers to obtain insureds willing to pursue such claims.

The attorneys brought motions to strike the complaint under Code of Civil Procedure section 425.16 (anti-SLAPP motions), arguing that their pursuit of insurance claims and acts in obtaining clients constituted prelitigation conduct protected by their First Amendment right to petition. The trial court denied the motions, on the basis that the attorneys had failed to establish protected conduct, specifically relying on authority holding that the submission of insurance claims does not constitute protected conduct under the anti-SLAPP law.

The attorneys appealed. The Court of Appeal agreed with the attorneys that, under the proper circumstances, submission of an insurance claim can constitute prelitigation conduct protected by the anti-SLAPP law. However, mere bald assertions that the claims were submitted with the subjective intent that litigation would follow are insufficient, without more, to constitute prima facie evidence that the insurance claims constituted prelitigation conduct.

FACTUAL

The Court of Appeal found the following facts to be clear:

(1)     There were wildfires in Southern California in 2003, 2007, 2008, and 2009;

(2)     Attorney Anapol represented a number of Farmers’s insureds in their pursuit of smoke and ash claims arising out of the 2003 wildfire;

(3)     Attorney Amidon represented a number of Farmers’s insureds in their pursuit of smoke and ash claims arising out of the wildfires in 2007, 2008, and 2009;

(4)     Glenn Sims, and/or one of the companies with which he was affiliated, was involved to some degree in the claim handling process on behalf of the insureds;

(5)     Farmers paid on some, but not all, of the claims; when it did pay, it often did not pay the full amount sought by the insureds; and

(6)     Attorneys Anapol and Amidon represented Farmers’s insureds in bad faith actions arising out of Farmers’s handling of the smoke and ash claims, some of which are still pending.

Farmers alleged there was a conspiracy to defraud Farmers (and other insurance companies), which was the brainchild of Sims.  Sims was what is known as a “catastrophe chaser.” He travelled the country, following natural disasters. After a disaster, he would advertise in the area for clients, letting them know that he could obtain substantial insurance benefits for them for damages about which they may have been unaware. Sims was not a public adjuster, however, and chose to conduct his business through the use of attorneys. Thus, when a homeowner would contact him, Sims would have the client execute a retainer agreement with an attorney with whom Sims worked. Sims would then submit to the insurer a letter from the attorney designating Sims as a “property damage consultant” on the claim, and requesting the insurer to negotiate directly with Sims. Sims would then send someone to “scope” the claim and create a repair estimate, often based only on the size and contents of the home, with no attention paid to whether there was evidence of actual damage. Sims would submit the estimate and negotiate a settlement of the claim. Once a settlement was received by the attorney from the insurance company, it was divided, on a percentage basis, between the client, the attorney, and Sims (and his associates). In sum Farmers alleged that the part played by the attorneys in this conspiracy included:

(1)   paying Sims to obtain clients to submit insurance claims; and

(2)   submitting false and/or inflated damage estimates in support of claims.

The attorneys view of the facts was different. According to the attorneys, all of their clients were legitimate referrals; the attorneys did not pay Sims for obtaining clients. Moreover, according to the attorneys, all of the damage estimates submitted were legitimate.

In the alternative, the attorneys take the position that if Sims submitted fraudulent documents in support of the claims, the attorneys had no knowledge of this fact, and believed all of the claims to be legitimate. Finally, the attorneys argue that Farmers improperly denied or undervalued the claims, causing the attorneys to bring bad faith actions.

The Anti-SLAPP Motions

Both Attorneys brought anti-SLAPP motions. Each attorney argued that the suit was brought in retaliation for the attorneys’ pursuit of legitimate claims and bad faith actions against Farmers. As to the issue of whether the conduct for which they were sued was protected by the anti-SLAPP statute, each attorney made a slightly different argument. Attorney Anapol argued that all of his alleged conduct underlying Farmers’s complaint was protected prelitigation conduct, as his submission of claims constituted prelitigation negotiations to settle the smoke and ash claims without the need of lawsuits. In support of his motion, Attorney Anapol submitted a declaration indicating that of the 42 insurance claims at issue from the 2003 wildfire, 29 were settled, 5 were ultimately dropped, and 8 were resolved in favor of the insureds after arbitration.

Attorney Amidon, in contrast, argued that his alleged conduct constituted both protected petitioning activity and protected speech. As to the issue of protected speech, Attorney Amidon argued that his supposed capping activity constituted protected speech on an issue of public interest, in that soliciting clients constitutes speech and the wildfires were of considerable public interest.

ISSUES ON APPEAL

The main issue raised by the parties is whether precedent completely bars all insurance claims from ever constituting prelitigation conduct. The Court of Appeal concluded that it does not; instead, submitting an insurance claim in the usual course of business does not constitute prelitigation conduct, but circumstances may exist  such that submitting the claim is protected prelitigation conduct. Defendants like the attorneys must make a prima facie case that the claims submitted in this case constitute prelitigation conduct. The Court of Appeal concluded the attorneys did not prove a prima facie case.

There is a two-step process for evaluating an anti-SLAPP motion.

First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity.The moving defendant’s burden is to demonstrate that the act or acts of which the plaintiff complains were taken in furtherance of the defendant’s right of petition or free speech under the United States or California Constitution in connection with a public issue. Second, as defined in the statute and if so, whether the plaintiff met its evidentiary burden on the second step.

If a prelitigation statement concerns the subject of the dispute and is made in anticipation of litigation contemplated in good faith and under serious consideration, it falls within the scope of the statute. When an attorney seriously and in good faith contemplates litigation, and sends the opposing party a demand letter, the demand letter has been held to constitute a protected prelitigation statement.

The submission of a claim is often the first time an insurer becomes aware that its insured seeks payment under the contract. Thus, it cannot be determined, by the mere fact of submission of a claim, that the claim has been submitted merely for adjusting or if it has been submitted in anticipation of litigation contemplated in good faith and under serious consideration.

Although both the wildfires and the business of insurance are matters of public interest none of the statements or acts of the attorneys which form the basis for Farmers’s complaint were made in connection with these issues. The attorneys allegedly used cappers to find clients to bring individual claims against their insurers for damages to their homes individually suffered in the fires. Such claims are indisputably private in nature.

As the attorneys have failed to make a prima facie showing that the conduct underlying Farmers’s complaint arises from protected acts of petitioning or speech, the anti-SLAPP statute does not apply. The trial court’s order denying the anti-SLAPP motions will be affirmed.

ZALMA OPINION

Farmers should be commended for bringing an action against those it reasonably believes were engaged in insurance fraud. The court correctly noted that an insurance claim is not filed, normally, in anticipation of litigation. Usually, and in the great majority of all claims filed, they are filed in anticipation only of receiving the benefits promised by the policy. Litigation is only anticipated after the adjustment of the claim fails.

It is time for insurers to stop treating insurance fraud as a cost of doing business that they can pass on to their customers and add to their profit picture by aggressively working to defeat fraud.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

 

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Lack Of Waiver of Subrogation is Expensive

Interinsured Claims Exclusion Does not Apply

Delos Insurance Company appealed a judgment entered in favor of respondent Gemini Insurance Company, after Gemini’s motion for summary judgment was granted. In Gemini Insurance Company v. Delos Insurance Company, No. B239533 (Cal.App. Dist.2 12/05/2012) a subrogating insurer attempted to recover what it paid for fire damages caused by the tenant of its insured to the leasehold property and property of others. The tenant’s insurer refused because it also insured the landlord as an additional insured.

FACTS

A restaurant’s insurance policy included an additional insured endorsement which made the restaurant’s landlord an additional insured with respect to the landlord’s liability arising from the restaurant’s acts, undertaken in the course of the restaurant’s operations on the leased premises. The insurance policy also had an exclusion for claims or suits between insureds.

The tenant negligently started a fire on the leased premises. The fire damaged the landlord’s property, and the landlord sought to recover from the restaurant for the damages.

Delos insured a restaurant called Bobby’s Focsle and its owners, Helen and Bobby Boyett (hereafter “Bobby’s”). Bobby’s was located in the Loch Lomond Marina in San Rafael, and its landlord was San Rafael Marina, LLC, dba Loch Lomond Marina (hereafter “Loch Lomond”). A fire at Bobby’s caused damage to Loch Lomond’s property, and to another business located in the marina, Arena Yacht. Both Arena Yacht and Loch Lomond were insured by Gemini for property damage.

Arena Yacht and Loch Lomond made claims on their property insurance. Gemini paid Arena Yacht $65,088 and paid Loch Lomond $288,259, for the damage caused by the fire, then filed an action in subrogation against Bobby’s, alleging that Bobby’s negligence caused the fire. Delos defended Bobby’s in that action.

The case settled. Bobby’s and Gemini entered into a stipulated judgment for the total which Gemini had paid to its insureds. Delos paid $65,088 of the judgment, that is, the amount Gemini paid to Arena Yacht. Gemini agreed that it would not execute against Bobby’s for the remainder, and Delos and Gemini agreed to further litigate Delos’s obligations. To that end, Gemini filed this suit under Insurance Code section 11580, subdivision (b)(2), which authorizes an insured’s judgment creditor to bring an action against the insurer.

Although the case was decided on summary judgment, there were never any disputed facts. Instead, stipulated facts were submitted to the trial court, and the parties agreed that there was only one issue, which involved interpretation of the Delos policy and was an issue of law.

THE ISSUE

Bobby’s insurance did not provide coverage for any claim or suit brought by another insured. Delos’s position was that Loch Lomond was an insured on Bobby’s policy. Thus, Delos did not cover Bobby’s for a claim by Loch Lomond for damage to Loch Lomond’s property. Gemini’s position was that Loch Lomond was not an insured under Bobby’s Delos policy.

The trial court agreed with Gemini, finding that “pursuant to the plain language of the Delos policy, including the additional insured endorsement to the Delos policy, Loch Lomond was never an ‘insured’ under the Delos policy.” The court entered judgment in Gemini’s favor in the amount of $288,259, the amount Gemini had paid to Loch Lomond for the damage caused by the Bobby’s fire.

ANALYSIS

The Interinsured Claims and Suits Exclusion in Bobby’s Delos policy provides that:

“The liability coverage afforded by this policy does not apply to any claim or ‘suit’ for damages by any ‘insured’ against another ‘insured’ because of ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’. We have no obligation to defend or indemnify any ‘insured’ as to any such claim or ‘suit’ by another ‘insured’.”

Delos cites that exclusion and the policy’s definition of “insured,” which states that:if you are designated in the declarations as . . . an organization other than a partnership, joint venture, or limited liability company, you are an insured.” As Delos points out, the Additional Insured endorsement to the policy lists Loch Lomond as an additional insured.

All of this supports Delos’s position, but there is another relevant policy provision which compels a result to the contrary. An endorsement titled “Additional Insured – Managers or Lessors of Premises” reads:

“Who is an Insured (section II) is amended to include as an insured the person or organization shown in the Schedule but only with respect to such person or organization’s liability which both (1) arises out of the ownership, maintenance or use of that part of the premises leased to you and shown in the Schedule, and (2) occurs on that part of the premises leased to you and shown in the Schedule, and (3) results from and by reason of your act or omission or an act or omission of your agent or employee in the course of your operations at that part of the premises leased to you and shown in the Schedule.”

As Gemini reads this provision, Loch Lomond is an additional insured only when and where it faces liability arising from Bobby’s acts, undertaken in the course of Bobby’s operations on the leased premises. The trial court agreed. An additional insured provision is designed to protect parties who are not named insureds from exposure to vicarious liability for acts of the named insured.

The parties agreed that no one ever sought to hold Loch Lomond liable for the fire at Bobby’s. To the contrary, in the underlying case, Loch Lomond sought to recover from Bobby’s. The court of appeal concluded that the interinsured claims and suits exclusion did not apply.

While it is true that the endorsement did not delete the definition of insured, that is no help to Delos, because the modification makes its position clear.

Delos argued that the additional insured endorsement merely changes the scope of the coverage afforded to the additional insured. The record establishes that Loch Lomond insisted as a condition of the lease that Bobby’s carry liability insurance, and insisted that it be named as additional insured on the Bobby’s policy. This is no doubt a common practice among commercial landlords, and indeed the policy endorsement is designated as one for landlords. Loch Lomond would have done this in order to protect itself in the event that it was sued for Bobby’s negligence. It surely would not have done so in order to limit its ability to recover, in the event that it was injured by Bobby’s negligence.

ZALMA OPINION

This suit could have easily been avoided by simply including in the lease agreement a mutual waiver of subrogation and a provision in the two policies an agreement allowing waiver of subrogation. In fact, it could be argued – although it was not – that the property insurance was taken out for the mutual benefit of the landlord and the tenant and that, as a result, the landlord waived its right of subrogation against the insured by agreeing to rely upon its own property insurance.

A prudent lessor requires a tenant to insure it against liability for suits resulting from the action of the tenant. It will also require the tenant to pay its fair share of the property insurance on the building leased with other tenants and then each will agree that they will rely on the proceeds of their own insurance and waive their insurer’s right to subrogate against each other. The landlord and tenant in this case were not prudent and were compelled to litigate.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

 

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Life Insurer Must Pay If No Evidence of Murder by Beneficiary

No Conviction of Murder – Pay

There is no question that a life insurer need not pay life insurance benefits to a beneficiary who murdered the insured. To allow a murderer to profit from his crime is against public policy and common morality. In Eric Debartolo v. American General Assurance Company, and Does 1 Through 25, Inclusive, No. 1:12-CV-01419-LJO-DLB (E.D.Cal. 11/29/2012) the insurer suspected that the plaintiff, Eric Debartolo had killed his parents. Their suspicion was based upon comments from the investigating detective that he could not eliminate Debartolo as one of the killers.

FACTS

Plaintiff, Eric DeBartolo, sought payment of benefits as the sole beneficiary of an Accidental Death and Dismemberment group insurance policy (“Policy”) issued by Defendant American General Assurance Company (“AGAC”) to Plaintiff’s mother, Sandra DeBartolo, providing her with basic and supplemental coverage in the amount of $3,000.00 and $100,000.00 respectively, as well as family protection insuring her spouse, Gary DeBartolo, for $60,000. Sandra and Gary DeBartolo were murdered in their home on July 22, 2009, and, although other individuals have been arrested and charged with the murder, Plaintiff has not been eliminated as a suspect.

AGAC refused to pay Plaintiff’s claim, citing California Probate Code § 252, which provides “[a] named beneficiary of a life insurance policy, or other contractual arrangement who feloniously and intentionally kills the person upon whose life the policy is issued is not entitled to any benefit under the policy, or other contractual arrangement, and it becomes payable as though the killer had predeceased the decedent.”

AGAC submitted extra-record evidence that purports to establish:

  1. that one of its agents has been in regular contact with the Detective investigating the murders;
  2. on numerous occasions, from December 2009 through the filing of this motion in September 2012, the Detective informed AGAC’s agent that Plaintiff “had not been eliminated” as a suspect in the deaths; and
  3. that another charged suspect “could” implicate Plaintiff in the crime.

The District Court found that AGAC’s suggestion that the submitted declarations should be considered “because the complaint “specifically refers” to Detective Toscano’s investigation is patently absurd.” By this logic, any and all evidence related to any allegation in any complaint could be considered on a 12(b)(6) motion. As a result the court refused to consider the evidence and added that even if, arguendo, the evidence could be considered, the additional information would not alter the outcome of this motion.

ISSUE

Plaintiff filed this lawsuit on August 29, 2012, alleging AGAC’s refusal to pay out on his claim constitutes breach of contract and breach of the implied covenant of good faith and fair dealing. AGAC claims to be “[u]nable to pay the AD&D insurance benefits without avoiding potential liability to another party who may be the proper beneficiary if Plaintiff is convicted” of murdering his parents. Accordingly, AGAC has moved to dismiss Plaintiff’s lawsuit as “premature.”

DECISION

This motion is entirely without merit. In California, unreasonable delay in paying a covered claim may support a claim both for breach of contract and breach of the implied covenant of good faith and fair dealing. While California Penal Code § 242 precludes receipt of insurance benefits by a beneficiary who murdered (or conspired to murder) the named insured, only a judgment of conviction is conclusive for purposes of excusing payout.

The question of whether AGAC has unreasonably delayed payment of Eric DeBartolo’s claim cannot be decided as a matter of law. However, Plaintiff has properly stated claims for breach of contract and breach of the covenant of good faith and fair dealing. Among other things, he has alleged that AGAC “willfully failed to evaluate the claim objectively and properly or to conduct and diligently pursue a thorough, fair and objective investigation” and that “during the three-year period defendant withheld paying the claim, it never sought the advice of legal counsel.”

In light of the “Slayer Statute’s” entire statutory scheme, AGAC cannot simply sit on its hands and wait for the police to either indict Plaintiff or eliminate him as a suspect. AGAC’s motion to dismiss those claims as premature is DENIED.

ZALMA OPINION

Insurance fraud is a cancer on the insurance industry that has metastasized into a crime that takes from $80 to $300 billion a year from the American insurance buying public. It is important that insurance companies actively work to prevent insurance fraud. As I have said for the last 17 years in Zalma’s Insurance Fraud Letter insurers must do everything they can to defeat insurance fraud.

However, as this case clearly points out, work against insurance fraud must be based upon evidence, not surmise. AGAC had no evidence that DeBartolo killed his parents. All it had was the suspicion of a police officer who could only say that he could not eliminate him as a possible murderer. He did not have sufficient evidence to arrest, let alone try DeBartolo for the patricide.

To defend a claim on the basis of fraud; to accuse a person of patricide; to claim that a life insurance beneficiary is a murderer without evidence is just plain stupid. If they had performed a complete and thorough investigation, had gathered evidence that they believed a preponderance of the evidence would establish he killed, or conspired to kill his parents, they should have denied the claim. To just sit by and wait for the police, who have no interest in insurance and no obligation to deal with the beneficiary or the insurance company with the utmost good faith, is inept and incompetent.

When the case eventually goes to trial if AGAC cannot produce the evidence it will prove they conducted an incompetent, unfair and unreasonable investigation and failed to treat the beneficiary with utmost good faith. If the evidence established DeBartolo actually killed or conspired with others to kill his parents, the insurer will obtain a defense verdict. Of course, on a motion to dismiss, I would have expected to see some evidence, not just the guess of a police officer.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Claims File Protected Work Product

DISCOVERY OF CLAIM FILE BEFORE COVERAGE DECISION PROHIBITED

When an insured waits more than four years to report a wind damage loss should assume that the insurer will question the claim, reserve its right to investigate without waiving policy defenses, and that the insurer will anticipate litigation if it refuses coverage. The insured, before State Farm Florida Insurance Company (SFF), made a decision on the claim, sued SFF and sought the entire claim file. SFF asked the Florida Court of Appeal to review the trial court’s order which allowed discovery of activity log notes, emails, and photographs contained in the insurer’s claim file. State Farm contended that production of these documents constitutes improper, premature bad faith discovery. The Florida court of appeal, in State Farm Florida Insurance Company v. Meir Aloni, As Personal Representative of the Estate of Sonja, No. 4D11-4798 (Fla.App. 11/28/2012) resolved the dispute.

FACTS

The underlying action involves a property insurance coverage dispute. Meir Aloni, as personal representative of the Estate of Sonja Aloni, sued State Farm to recover for roof damage to a residence allegedly caused by Hurricane Wilma. Aloni alleged that he discovered damage to the roof around February 26, 2010, and immediately notified the insurer.

In his first request for production, Request #2, Aloni asked for State Farm’s “complete ‘Claims File.'” State Farm produced a number of documents, but objected to Request #2, asserting that this was protected work product and attorney-client privileged material, and that the request seeks proprietary information that is not relevant nor likely to lead to the discovery of admissible evidence. State Farm also objected that this request was vague and overbroad. It produced portions of the claim file for which any privilege was already waived and filed a privilege log for the remaining documents.

Aloni moved to compel production. He argued that State Farm was improperly withholding documents that were created before the denial of his claim and not in anticipation of litigation. He further argued that work product protection does not attach to portions of the claim file generated in the ordinary scope of the insurer’s business. State Farm responded that whether the policy covers the claim is a disputed issue because Aloni did not report the damage until approximately four-and-a-half-years after the hurricane, and that while the coverage issue is pending, the claims file is not discoverable.

ISSUES

State Farm also relied on an affidavit from its litigation specialist, who stated that because the deceased policy holder and her representative, Aloni, did not report the claim until years after the hurricane, State Farm sent Aloni a reservation of rights letter twelve days after receiving notice of the claim to inform him that it would investigate the claim. The affidavit stated that the log notes were prepared after the insurer received notice of the claim, and that the notes contain personal thoughts, evaluations, mental impressions, and recommendations regarding the claim and the possibility of litigation. The affidavit stated that the insurer did not intend the notes to be discoverable by third parties, only litigation counsel; the notes were prepared in contemplation of litigation because the late reported claim was a foreseeable basis for litigation. The affidavit further stated that the log notes include directives to counsel regarding the handling of litigation.

At a hearing on the motion to compel, Aloni asserted that the activity log notes (from the time the claim was made on April 14, 2010 to service of the lawsuit on December 17, 2010), internal emails, and photographs were not protected work product. Aloni argued that in this case the possibility of litigation was not substantial and imminent until State Farm learned of the suit. Aloni also contended that the claim file materials were relevant based on State Farm’s position that the claim was not timely reported. According to Aloni, this gave rise to a presumption of prejudice that Aloni had to overcome.

Following the hearing, the court conducted an in camera inspection. It then granted the motion to compel in part, ordering production of the activity log notes from April 14, 2010 to December 17, 2010, internal emails, and photographs. State Farm was ordered to file the documents under seal. The trial court denied State Farm’s motion for rehearing, but granted a stay pending resolution of the petition to the court of appeal.

State Farm argues that the trial court’s order departs from the essential requirements of law by allowing premature bad faith discovery in a coverage dispute. It cites Florida case law addressing the protected nature of claim file materials in actions where the coverage issue has not yet been determined.

State Farm argued that production of claim file material at this stage in the litigation will cause irreparable harm. State Farm stressed that the requested discovery is irrelevant to the coverage dispute.

The personal representative of the insured’s estate argues that the claim file materials ordered for production are relevant to the issue of whether the insurer was prejudiced by the untimely reporting of the claim.

ANALYSIS

Generally, an insurer’s claim file constitutes work product and is protected from discovery prior to a determination of coverage.

In this case, where the coverage issue is in dispute and has not been resolved, the trial court departed from the essential requirements of the law in compelling disclosure of State Farm’s claim file materials without the requesting party proving need and the inability to obtain the substantial equivalent of this material without undue hardship. Because State Farm has shown that such disclosure would result in irreparable harm that cannot be adequately addressed on appeal, we grant the petition and quash the discovery order.

ZALMA OPINION

The plaintiffs in this case should be ashamed by bringing a claim against an insurer for property damage more than four years after the loss. Since the hurricane that caused the damage Florida has seen multiple tropical rain storms and a hurricane or two. Damage caused by the original loss would, in normal course, have been increased and the ability of the insurer to assist its insured to prevent further damage would have been eliminated.

There is no question that an experienced claims person seeing a loss report more than four years after the alleged loss would have reserved rights to fully investigate, would presume a high possibility of a claim denial, and that – as a result – the insured would probably file suit. The court of appeal agreed with State Farm and concluded that the discovery of the information and investigation done in anticipation of litigation is protected work product.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Damages

Failure to Prove Damages Defeats Bad Faith Claim

When presenting a claim to an insurance company the person insured is obligated to prove to the insurer the loss was caused by a peril insured against, and the value of the property lost. Texas Farm Bureau Mutual Insurance Company (Texas Farm) appealed from a judgment awarding Joseph Wilde damages, lost profits, and attorney’s fees resulting from a jury verdict that Texas Farm committed unfair or deceptive settlement practices under the Texas Insurance Code. In Texas Farm Bureau Mutual v. Joseph Wilde, No. 08-11-00150-CV (Tex.App. Dist.8 11/30/2012) the Texas Court of Appeal was asked to reverse the trial court decision because Wilde failed to present evidence of the value of his property and rather than elect remedies sought – and received – both remedies in violation of the law of Texas.

BACKGROUND

Wilde had a policy of insurance with Texas Farm which insured Wilde’s 1999 John Deere 7455 cotton stripper for a maximum value of $90,000. Wilde filed a claim on the policy after the cotton stripper caught fire on December 16, 2005, and was “completely destroyed.” After Texas Farm denied Wilde’s claim, Wilde filed suit for breach of contract, breach of duty of good faith and fair dealing, and unfair settlement practices under the Texas Insurance Code, and sought to recover damages for the market value of the cotton stripper, lost profits, attorney’s fees, and treble damages.

The case initially proceeded to trial in 2010 and the trial court denied Texas Farm’s no-evidence and traditional summary judgment motions. Thereafter, the trial court granted Texas Farm’s motion for mistrial. The case was tried in 2011 and, prior to submission of the case to the jury, the trial court denied Texas Farm’s motion for an instructed verdict on lost profits and attorney’s fees. The trial court also overruled Texas Farm’s objections to the submission of market damages, lost profits, and attorney’s fees in the jury charge.

The jury returned a verdict in favor of Wilde, found that Texas Farm knowingly engaged in an unfair or deceptive act or practice that caused damage to Wilde, and found market-value damages in the amount of $75,000, lost profits in the amount of $60,000, and attorney’s fees in the amount of $30,000.

Before entry of the judgment, the trial court denied Texas Farm’s motion for judgment notwithstanding the verdict as to the jury’s award of the three damage elements. The trial court entered judgment in accordance with the jury’s verdict.

DISCUSSION

In five issues, Texas Farm contends the trial court erred in awarding $75,000 damages for diminution in market value, $60,000 lost profits, and $30,000 in attorney’s fees to Wilde in accordance with the jury’s verdict.

Market Value – Salvage Value

Texas Farm complained that the trial court erred in awarding market-value damages because no evidence of the market value of the cotton stripper immediately after the fire was presented at trial. The appellate court recognized that while seeking to recover damages for the loss or reduction of personal property’s value, market value is the typical method of valuation. Market value, in Texas, and elsewhere is defined as “the price property would bring when it is offered for sale by one who desires, but is not obligated to sell, and is bought by one who is under no necessity of buying it.” The market value of damaged or destroyed personal property is the difference in the property’s market value immediately before and immediately after the injury at the place where the damage occurred.

Wilde contended that the cotton stripper was totally destroyed by fire. Texas Farm asserts that the evidence at trial showed the cotton stripper was a total loss and Wilde was required, but failed, to prove the cotton stripper’s post-loss value in the form of its salvage value. Although evidence at trial showed the cotton stripper’s purchase price, its low “hours” of use, a lack of damage to the engine, and that the cotton stripper had salvage value in general, Wilde presented no evidence of the cotton stripper’s immediate post-fire market value in Reagan County.

Because Texas Farm proved the complete absence of a vital fact at trial essential to the determination of market value, the appellate court concluded that Texas Farm’s legal-sufficiency challenge must be sustained. Because no evidence existed to support the submission of an award of market-value damages to the jury, the appellate court concluded that the trial court erred in overruling Texas Farm’s objections to the jury charge on market value, its motion for judgment notwithstanding the verdict, and awarding market-value damages.

Lost Profits

Texas Farm also claimed that because Wilde sought to recover the market value of the destroyed cotton stripper, Wilde was not entitled to also recover the loss of its use or lost profits.

Typically, when personal property has been damaged, an injured plaintiff can recover the market value of the property. Loss-of-use damages are permitted where cost-of-repair damages are sought. A plaintiff may also be entitled to recover loss-of-use damages in the form of lost profits if he loses the opportunity to accrue earnings from the use of the damaged equipment.

A plaintiff, like Wilde, whose property is totally destroyed is not entitled to the election of remedies.  Rather, a plaintiff whose property is totally destroyed is limited to seeking the proper measure of market-value damages.

Wilde sought to recover and was awarded both market-value damages for the cotton stripper as well as lost profits. Because Wilde was limited to seeking only market-value damages for his burned cotton stripper, the award of lost-profit damages constitutes an impermissible double recovery.  The appellate court concluded that, as a result, the trial court erred when it permitted the jury to consider and determine lost-profit damages.

Attorney’s Fees

In Issue Five, Texas Farm contended the evidence is factually and legally insufficient to support the award of attorney’s fees. The appellate court concluded that it had no need to address the sufficiency of the evidence to support an award of attorney’s fees.

It has long been the American Rule that each party pays its own lawyers. Recovery of attorney’s fees is permitted only when authorized by statute, a contract between litigating parties, or under equity. To recover attorney’s fees under state statutes a plaintiff must prevail on a breach-of-contract claim and recover some damages.

Because the jury found that Texas Farm knowingly engaged in a deceptive or unfair settlement practice, the court was tempted to initially consider Wilde to be a prevailing plaintiff. However, whether a party prevails turns on whether the party prevails upon the court to award it something, either monetary or equitable. A party that recovers no damages, secures no declaratory or injunctive relief, obtains no consent decree or settlement in its favor, receives none of the relief sought in its petition, and receives nothing of value of any kind enjoys no benefit of “prevailing party” status for a stand-alone breach-of-contract finding, and should not recover attorney’s fees.

Because the award of market-value and lost-profit damages was reversed, and because Wilde has not obtained any of the specified relief that would permit a different outcome, Wilde received nothing of value, is not a prevailing party, and is not entitled to recover attorney’s fees.

ZALMA OPINION

Sometimes, as in this case, having a friendly judge who rules in favor of the plaintiff on each and every motion results in a favorable jury verdict only to find the verdict overturned because the friendly judge made it unnecessary to do everything necessary to properly prove a loss. The jury did not like the way the Texas Farm treated Wilde. They found it treated him badly. They punished Texas Farm by awarding damages to which Wilde was not entitled and as a result he received nothing.

The lesson learned is no matter how friendly the judge to your position never overreach, never seek double damages, never seek damages to which the plaintiff is not entitled, and always present sufficient evidence to prove the case. If not you may find yourself slapped by the appellate court and walk away with nothing more than a piece of worthless paper.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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The Importance of the Waiver of Subrogation

How to Avoid Litigation

A waiver of subrogation is useful in construction contracts because it avoids disrupting the project and eliminates the need for lawsuits. The contract price can be reduced by an agreement between the owner and the builder that the insurance in effect for the owner should be the sole source of recovery when a loss occurs. Applying the waiver to all losses covered by the owner’s property insurance policy eliminates litigation over liability issues and whether the claimed loss was damage to the Work or non-Work property.

The Iowa Court of Appeal was required to resolve a dispute between a subrogating insurer and three contractors over the right of subrogation in Federal Insurance Company, As Subrogee of Buena Vista County Hospital v. Woodruff Construction, et al, No. 2-946 / 12-0821 (Iowa App. 11/29/2012). Federal Insurance Company (Federal) appealed from the trial court’s grant of summary judgment in favor of several contractors in its subrogation suit. Federal believed the waiver did not apply.

Background

Buena Vista County Hospital (hospital) contracted with Woodruff Construction (Woodruff) to make certain improvements in the hospital, including a new operating suite and related support rooms. Woodruff subcontracted portions of the work to three other contractors. During construction a sprinkler in the mechanical support room for the new operating room activated, resulting in extensive water damage. The water damaged some of the construction project and also damaged the contents of a storage room unrelated to the construction.  The parties agreed that ninety percent of the damages related to the cost of replacing the contents of the storage room.

Federal, the hospital’s property insurance provider, paid the hospital for all of its damages, then, as subrogee of the hospital, sued the contractors to recover the amount paid to the hospital. The contractors moved for summary judgment, contending the hospital waived subrogation rights against the contractors in the contract between the hospital and Woodruff. The trial court granted summary judgment in favor of the contractors, ruling the hospital waived any right of recovery against the contractors to the extent damages were covered by insurance.

Issue

The Court was asked to determine if the waiver language in the construction contract applied only to damages to “the Work” or to any damages covered by insurance applicable to the Work? Section 11.4.7 describes the waiver, as follows:

The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architects’ consultants, separate contractors described in article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.4 or other property insurance applicable to the Work, except such rights as they shall have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.

Federal contends the waiver extends only to damages to “the Work,” which all agree refers to the construction project. The contractors contend the waiver extends to any damages covered by insurance provided “pursuant to this Section 11.4 or other property insurance applicable to the Work.”

Trial Court Decision

The district court, after examining sections the AIA form construction contract ruled:

“[T]he question becomes whether the damages now claimed were ‘caused by . . . causes of loss to the extent covered by property insurance’ issued by Federal. The alternate question is whether the claim is for damages caused by ‘causes of loss covered by other property insurance applicable to the work.’

“This is clearly the case here. . . . [T]he scope of the subrogation waiver is not defined by what property got damaged.

“The scope of the subrogation waiver is defined by the extent of coverage of property insurance applicable, whether it insures the work or not, so long as it was ‘retained or maintained’ pursuant to paragraph 11.4 or is ‘other property insurance applicable to the work.’ Thus, the scope of subrogation waiver is defined by the scope of coverage. Here, the scope of coverage was broad enough to cover both work and non-work property.”

Analysis

The provisions of section 11.4 in the contract are standard boilerplate provisions concerning property insurance from the American Institute of Architects (AIA) Document A201. Courts in many jurisdictions have addressed contract language identical or nearly identical to the provisions at issue here. All agree the language such as found in section 11.4.7 waives any claim the property owner or its insurance company as subrogee might have against contractors “for damages caused by fire or other causes of loss.”

The majority of courts limit the waiver to the proceeds of the “property insurance obtained pursuant to [the contract] or other property insurance applicable to the Work.” These courts make no distinction between damages to “work” and “non-work” property. Instead, they consider whether the insurance policy was broad enough to cover damages to work and non-work property and whether the policy paid for the damages. If the answer to both questions is yes, the waiver applies.

The minority of courts ask only whether the damage was to the “work.” If so, the waiver applies; if not, the waiver does not apply. Federal’s arguments sought to convince the Court of Appeal to adopt the minority approach.

Contrary to Federal’s desire, the Iowa Court of Appeal found that the majority approach comports better with all the contract language, the policies underlying the waiver, and Iowa law and adopted the majority approach. It concluded the trial court correctly outlined the gist of the language in the AIA form contract, noting the hospital and Woodruff agreed:

  1. To waive all rights
  2. Against each other
  3. For damages caused by fire or other causes of loss, to the extent covered by
    1. Property insurance obtained pursuant to this Section 11.4, or
    2. Other property insurance applicable to the work.

Decision

The Federal policy was existing property insurance, not a specific policy “obtained pursuant to this Section 11.4.” Federal’s general property insurance policy, therefore, was “other property insurance applicable to the work.” The damages sustained by the hospital caused by the sprinkler head activation were caused by “other causes of loss.” They were entirely covered by the Federal’s general property insurance policy, less a deductible amount. Thus, according to the plain, unambiguous language of section 11.4.7, the hospital and Woodruff agreed to waive all rights against each other for damages “to the extent covered” by Federal’s “property insurance applicable to the work.”  As written, the waiver looks to whether the loss was covered by insurance, not whether the loss was to “the work.”

It is a fundamental and well-settled rule that when a contract is not ambiguous, a court must simply interpret it as written and give effect to the language of the entire contract according to its commonly accepted and ordinary meaning.

The Court of Appeal concluded the district court committed no error in construing the contract language, the policies underlying the waiver, and Iowa law and that Federal had no right because its insured waived its right to subrogate.

ZALMA OPINION

Most, but not all, commercial insurance policies allow an insured to waive subrogation if it does so before a loss. Some allow waiver to certain described classes of people after a loss. Almost every AIA based construction contracts contain a broad waiver of subrogation like that described in this case. If the owner’s property insurance allows waiver there is no problem. If it does not, and the owner waives subrogation, it can find itself without insurance coverage for simple, run-of-the-mill breach of contract.

Every person must read contracts they enter into. Every insurance agent and broker must be certain that their insured’s obtain a policy that allows for waiver of subrogation.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Collateral Estoppel Defeats Claim

No Coverage for Willful Sexual Harassment

A very wealthy serial sexual abuser sought insurance coverage for his actions when charged by one of his victims. The insurer concluded that there was no coverage available to the abuser because of an exclusion for willful abuse and because the issue was resolved in an arbitration (later reduced to judgment) between the abuser and his then employer.

The First Circuit Court of Appeal was called upon to resolve an insurance coverage dispute that arose from charges of sexual harassment brought by a one-time employee against appellant Luciano Manganella, the former president of Jasmine Company, Inc. In Luciano Manganella v. Evanston Insurance Company, No. 12-1137 (1st Cir. 11/27/2012) Manganella sought a defense to and indemnity for the harassment claims from Evanston Insurance Co., Jasmine’s liability insurance provider. The district court ruled that Manganella was not entitled to coverage from Evanston because, under the doctrine of issue preclusion, a prior arbitration between Manganella and the purchaser of his business conclusively established that Manganella’s conduct fell within an exclusion to Evanston’s insurance policy.

Facts & Background

Manganella was the president and sole shareholder of Jasmine, a clothing retailer that he founded in the 1970s. Donna Burgess, whose sexual harassment allegations against Manganella form the underlying claims here, was Jasmine’s human resources manager from 1997 to 2006.

In 1998, a former Jasmine employee, Sonia Bawa, filed claims of sexual harassment against Jasmine based on Manganella’s conduct. Soon thereafter, Jasmine purchased from Evanston the Employment Practices Liability Insurance Policy at issue here (the “Policy”). Jasmine’s coverage from Evanston under the Policy consisted of a series of annually renewed one-year installments. The Policy covered any “claim” that sought relief for a Wrongful Employment Practice and is made and reported to Evanston during the policy period or an extended reporting period.  A Wrongful Employment Practice includes, as defined in the policy was, “conduct of an Insured with respect to . . . [an] employee that allegedly culminated in . . . violation of any state, federal or local civil rights or anti-discrimination law and/or fair employment practices law.”  (Emphasis added)

The Policy also excluded by the “Disregard Exclusion” coverage for claims based on “conduct . . . committed with wanton, willful, reckless or intentional disregard of any law or laws that is or are the foundation for the Claim.” (Empahsis added)

In July 2005, Manganella sold Jasmine to Lerner New York, Inc. for approximately $30 million. Manganella and Lerner executed a stock purchase agreement (“SPA”) to effectuate the sale and an employment agreement under which Manganella would remain Jasmine’s president for three years. Under the SPA, $7 million of the purchase price was placed in escrow, “as security . . . in the event of a Major Employment Breach” by Manganella.

In May 2006, further allegations of sexual harassment by Manganella prompted Jasmine to hire an outside investigator, Stier Anderson LLC, which interviewed several employees, including Burgess; she recounted inappropriate comments that Manganella had made in the past. On June 22, 2006, as a result of conduct revealed by the investigation, Manganella was fired. In a letter to Manganella, Lerner accused him of committing multiple Major Employment Breaches by sexually harassing four female employees and downloading sexually explicit images on company computers, all in violation of Lerner’s Code of Conduct. Lerner demanded that Manganella agree to release the escrowed $7 million.

Lerner invoked the SPA’s arbitration clause and after days of hearing the panel issued its ruling finding that Manganella had “sexually propositioned several women employees and inappropriately touched and propositioned one of these employees,” in willful violation of Lerner’s corporate Code of Conduct. The panel explained: “We find, despite his protestations to the contrary, that [Manganella] was well acquainted with the Company’s policy on sexual harassment and other acts of inappropriate conduct. We find thus that he did not comply with the policy and that his refusal was willful.”

Roughly a month before the arbitration ended Burgess filed a charge of discrimination against Manganella, Lerner, and Jasmine with the Massachusetts Commission Against Discrimination (“MCAD”).

Ten days after Burgess filed the MCAD charge, Manganella notified Evanston of her claims and requested coverage under the Policy. Evanston replied, denying coverage for Burgess’s claims on the ground that it was “apparent” that the harassment alleged in her MCAD charge “did not happen in its entirety subsequent to the … Retroactive Date,” as required for coverage. Evanston’s letter also relied upon, without elaboration, the Disregard Exclusion.

Manganella sued Evanston seeking a ruling that Evanston was required under the Policy to defend and indemnify him against Burgess’s MCAD charge. He also alleged breaches of contract, breach of the duty of good faith and fair dealing, and violations of Massachusetts statutes stemming from Evanston’s refusal to defend and indemnify him. Both parties moved for summary judgment.

Analysis

The appeal was limited to whether the district court properly applied the doctrine of issue preclusion to bar Manganella from litigating whether the Policy’s Disregard Exclusion applies to the conduct alleged in Burgess’s MCAD charge. The district court held that the arbitration between Lerner and Manganella had decided, in the affirmative, the crucial question of whether Manganella’s acts, as alleged by Burgess, were committed with wanton, willful, reckless, or intentional disregard for the Massachusetts sexual harassment law that formed the basis for her claims against him.

Issue preclusion (called collateral estoppel in most jurisdictions) prevents a party from relitigating issues that have been previously adjudicated. Under modern preclusion doctrine, the central question is whether a party has had a full and fair opportunity for judicial resolution of the same issue.

Final arbitration awards affirmed by a court are generally afforded the same preclusive effects as are prior court judgments. Under those traditional requirements, issue preclusion may be applied to bar relitigation of an issue decided in an earlier action where:

(1)     the issues raised in the two actions are the same;

(2)     the issue was actually litigated in the earlier action;

(3)     the issue was determined by a valid and binding final judgment; and

(4)     the determination of the issue was necessary to that judgment.

Collateral Estoppel Does Not Require Identical Issues

For issue preclusion to apply to the insurance dispute, the arbitrators must have decided an issue the same as the one presented in the insurance dispute. The identity of the issues need not be absolute; rather, it is enough that the issues are in substance identical. Further, the issue need not have been the ultimate issue decided by the arbitration; issue preclusion can extend to necessary intermediate findings.

In fact both the state law and the Lerner rules of conduct prohibit “sexual advances,” “requests for sexual favors,” and other “verbal” or “physical” “conduct of a sexual nature.”

The First Circuit concluded that the arbitrators effectively decided the issue presented to them. The arbitration award found a willful violation of the Lerner Code and the proof submitted to the arbitrators showed that Manganella’s conduct was committed in disregard of the law. The law and Lerner’s code were effectively the same. The arbitration sufficiently established that Manganella was “quite familiar with the subject of sexual harassment,” having in 1998 updated Jasmine’s company policy to reflect the same Massachusetts sexual harassment law that was the basis of Burgess’s claims against him.

At the arbitration Manganella vigorously litigated both the truth of those allegations and the question of whether he knew that his behavior was prohibited.

The arbitrators’ determination that Manganella sexually harassed his employees in willful violation of the Code was necessary to the actual decision reached by the arbitrators.

The arbitration presented Manganella with the “full and fair opportunity” for adjudication of the issue at hand that is the centerpiece of modern issue preclusion doctrine. The extent of his harassing conduct and his knowledge that it was prohibited were vigorously litigated and were essential to the arbitration panel’s judgment. Allowing Manganella to contest these questions in the dispute with the insurer would contravene the twin goals of issue preclusion: protecting litigants from the burden of relitigating settled issues and promoting judicial economy by preventing needless litigation.

ZALMA OPINION

Manganella, in both the arbitration and the suit against Evanston, the insurer, is a definition of “Chutzpah” (unmitigated gall). Not only did he abuse his female employees as a matter of course, he managed to acquire $30 million by selling the business and staying on – with a promise of good behavior – as president of the company. He was fired when he continued his acts of harassment and abuse. He litigated the firing and lost because the arbitrators found he had acted willfully in violation of the law and the contract.

Then, after losing once, he attempted to argue the same facts in an insurance dispute. The court properly found that the doctrine of preclusion or collateral estoppel prevented the relitigation of the same issue. He is required to defend the case out of the $30 million he received from the sale.

Insurers faced with similar issues should take heed and, if the facts warrant, assert collateral estoppel as a defense.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Report Loss Promptly or Lose Coverage

Insured Who Hid Facts of Loss From Insurer Loses

The Duty of Utmost Good Faith

Insurance is a business of utmost good faith at the time the insurance is acquired, at all times the policy is in effect and during the claims process. Many believe, incorrectly, that the obligation to act in good faith is a one way street that only applies to an insurer in its contact with the insured but applies equally to the insured in its contact with the insurer. The insured is required by the implied covenant of good faith and fair dealing to advise its insurers of all facts that might be material to the decision of the insurer to exercise its right to determine whether it desires to insure risks of loss. A reasonably prudent business, knowing that it faced serious expense in cleaning up pollution, would advise its insurer of the existence of such a risk before applying for insurance. In Wisconsin an insured did not advise its insurers of the existence of the risk it knew existed before the policies came into effect.

Between October 1969 and February 1980, Certain Underwriters at Lloyd’s & London Market Insurance Companies (“Lloyd’s”) supplied Ansul, Inc. and Tyco International (US), Inc. (“Ansul”) with nine excess policies with varying coverage dates. From the 1950s to 1977, Ansul caused severe environmental damage by contaminating groundwater near the Menominee River with substantial quantities of arsenic. At no time between the 1950’s and 1977 did Ansul advise its insurers of the existence of the environmental damage it knew it had caused. The Wisconsin Department of Natural Resources (“DNR”) became involved in the early 1970s, and in 1981 ordered Ansul to construct a groundwater treatment system that operated until 1986, at a cost of over $11 million. In 1990, the federal Environmental Protection Agency (“EPA”) determined that significant quantities of arsenic remained, and ultimately ordered Ansul to conduct further remediation.

Ansul, for the first time, notified Lloyd’s of the contamination or government-ordered remediation in 1997. It did so only by filing a declaratory action against Lloyd’s in New Hampshire. Ansul later commenced similar actions in Wisconsin, which were consolidated and ultimately dismissed on summary judgment. The circuit court concluded Ansul was not entitled to coverage because it had breached the notice and cooperation clauses of the pertinent policies. Ansul asked the Court of Appeal to reverse the trial court in Ansul, Inc. and Tyco International (Us), Inc v. Employers Insurance Company of Wausau, No. 2011AP2596 (Wis.App. 11/27/2012) contending that the insurers were not prejudiced by its delay.

BACKGROUND

Between 1957 and 1977, Ansul produced agricultural herbicides containing both organic and inorganic arsenic. From 1957 until the early 1960s, waste arsenic salt was discharged directly into the Menominee River. Ansul also stored salt in unlined waste piles that were not covered until 1973. In 1967, Ansul transferred most of the existing waste salt, and newly produced salt, to a polyethylene-lined concrete storage vault. The vault developed cracks and the liner ruptured. By 1977, Ansul was storing approximately 95,000 tons of arsenic salt in the vault and in various other locations at its Marinette site.

The DNR became involved with the arsenic salt problem in 1971. In 1973, it issued a consent order to Ansul. The DNR found the waste salt was a toxic or hazardous solid waste under Wisconsin law and required “special storage, handling, and disposal.” It found that the vault, which was uncovered and exposed, was not satisfactory, as the DNR suspected that it was leaking and feared that the vault was in danger of collapse from the 37,500 tons of salt piled ten feet above its side walls. The DNR also noted that some salt had been stored outside the vault on a loading dock within ten feet of the Menominee River. Ansul representatives met with officials from the DNR and Wisconsin Attorney General’s office in 1974. According to a memo from this meeting, an analysis of groundwater samples indicated “that Ansul has severely contaminated the local groundwaters with organic and inorganic arsenic, in violation of state laws.”

By 1990, Ansul had established a $5 million reserve to deal with on-site environmental problems. That year, the EPA found that significant quantities of arsenic remained under and adjacent to Ansul’s facility. Pursuant to a consent order, Ansul was required to conduct a facility investigation and a corrective measures study, and submit bi-monthly reports to the EPA and DNR. According to a 1991 internal memorandum, Ansul estimated the cost of cleanup alone at “somewhere between $8 million and $15 million.”

After additional studies, the EPA ordered Ansul to remediate contaminated areas. Ansul estimates it has spent over $46 million on remediation, with an additional $16 to $30 million in future costs likely.

The Excess Insurance Policies

Between October 1969 and February 1980, Ansul maintained nine separate excess liability policies with Lloyd’s. These policies had varying attachment points and dates of coverage. According to a 1990 internal memorandum, Ansul was advised by its brokers not to give notice of the environmental issues because the insurers would likely deny liability and increase Ansul’s premiums. Nonetheless, in 1991, Ansul began notifying its insurers – but not Lloyd’s – that it may be liable for waste investigation and cleanup under state and federal law.

The Litigation

In 1997, Ansul commenced a declaratory action in New Hampshire against Lloyd’s. Lloyd’s received notice of the service of process on December 22, 1997. This was the first notice of Ansul’s claim regarding the Marinette site that Lloyd’s received.

Ansul commenced the present action in Marinette County in 2004 against Lloyd’s and other insurers. Lloyd’s filed a motion for summary judgment, which the circuit court granted. The court concluded that, despite years of negotiation, investigation, and remediation with the DNR and the EPA, Ansul failed to timely notify Lloyd’s of its potential liability. It also determined Ansul breached the policies’ “Assistance and Cooperation” clauses by immediately putting Lloyd’s in an adversarial position by suing them.

DISCUSSION

Each policy contained provisions relating to notice and cooperation.

It is undisputed that, as of 1991, Ansul had spent in excess of $11 million on site investigation and remediation and had established a $5 million reserve to fund future cleanup expenses, which it estimated at somewhere between $8 million and $15 million. Thus, by 1991 at the latest, Ansul should have known its liability for the contamination at the Menominee River site was likely to reach the attachment point for at least one of the policies.  Nonetheless, it waited six years to notify Lloyd’s of the claim, well after its other insurers had been notified. The Court of Appeal concluded that this constitutes unreasonable delay.

Lloyd’s emphasized that Ansul employees and representatives were unable to explain why Ansul did not notify the insurer sooner. Presumably, these witnesses either did not know or did not wish to reveal the undisputedly intentional nature of the omission especially because of the advice of the broker which was followed in part and not followed in part.

In Wisconsin, a delay of as little as thirteen days, without explanation, can be unreasonable. Other cases found unreasonable unexplained delays of three years, one year, and three months, as a matter of law.

Ansul argued no prejudice. Prejudice to the insurer in this context is a serious impairment of the insurer’s ability to investigate, evaluate, or settle a claim, determine coverage, or present an effective defense, resulting from the unexcused failure of the insured to provide timely notice. Whether an insurer has been prejudiced is governed by the facts and circumstances in each case.
The purpose of insurance notice requirements exists so an insurer can fulfill its need for an opportunity to investigate possible claims against the policy or its insured while the witnesses are available and their memories are fresh. An insurer cannot make a reasoned judgment as to its contractual obligations until it has had the opportunity to examine and review the factual situation, and this investigation cannot commence until the insured has fulfilled its duty to provide notice.

At least by 1986 – and likely much earlier as to several of the excess policies – Ansul’s expenditures had exceeded the attachment point for all policies except one. Ansul’s notice for these policies was at least eleven years late. With respect to the last policy Ansul’s notice was at least six years late.

The cooperation clauses at issue in this case unambiguously required Ansul to provide Lloyd’s with an opportunity to associate with it and the underlying insurers in the control of any claim or proceeding reasonably likely to involve the policies. Tellingly, Ansul does not claim it has not breached the cooperation clauses. In adopting an adversarial position from the outset, Ansul deprived Lloyd’s of the opportunity to associate with the Assured or the Assured’s underlying insurers, or both, in the defense of any claim, suit or proceeding. The lengthy delay in notice becomes all the more prejudicial because once the insured brings a coverage suit, the duty of cooperation may be circumscribed by the adversary process.

It is apparent that by unnecessarily delaying notice and then immediately commencing a lawsuit, Ansul deprived Lloyd’s of any ability to investigate the scope of, or basis for, Ansul’s liability outside the adversary process. Ansul, with full knowledge of the underlying facts, had years in which to mitigate any potential coverage defenses available to Lloyd’s, like the known loss doctrine or pollution exclusions found in some of the excess policies. Cooperation provisions are designed precisely to prevent fraud.

ZALMA OPINION

Ansul knew about its environmental problems before it bought its first policy from Lloyd’s concealed that information over multiple renewals of the insurance. When it finally decided to report the claim, by filing suit, Ansul was decades late.

This suit should never have been filed. Ansul made a corporate decision to not report a loss to its insurers since it expected the claim to be denied and its premium to be raised. It knew that no insurer would agree to insure the pollution exposure if it knew that it was in the process of contaminating the ground water with arsenic and was in the process of attempting to clean it up after admitting responsibility. What it did was wait as long as possible, after evidence had been lost or disposed of, and then made a claim contending the insurers were not prejudiced. To make such a claim was evidence of unmitigated gall.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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State Can Rewrite Policy

Statute Changing Policy May Not Apply Retrospectively

The Supreme Court of South Carolina was asked by Harleysville Mutual Insurance Company (Petitioner) to assess constitutional challenges to Act No. 26 of the South Carolina Acts and Joint Resolutions which regulates coverage provided by commercial general liability (CGL) insurance policies for construction-related work. In Harleysville Mutual Insurance Company v. the State of South Carolina; the South Carolina Department of Insurance; David Black, In His Official Capacity As Director of the, No. 27189 (S.C. 11/21/2012) the court, over a strenuous dissent, found the statute to be valid but its retrospective effect is unconstitutional.

FACTS

On January 7, 2011, this Court issued an initial opinion in Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company, Op. No. 26909 (S.C. Sup. Ct. filed Jan. 7, 2011) (Crossmann I), wherein it addressed the definition of “occurrence” in a CGL policy.

In Crossman I, the Court held where “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” the term is unambiguous and retains its inherent fortuity requirement.  Based on this determination, this Court found that Respondents Crossmann Communities of North Carolina, Inc. and Beazer Homes Investment Corporation (collectively Crossmann) were not entitled to coverage under Petitioner’s CGL policy for claims arising out of damage to condominiums caused by faulty workmanship.

Specifically, this Court reasoned that because “the damage to the insured’s property [was] no more than the natural and probable consequences of faulty workmanship,” there was “no fortuity element present under this factual scenario.” The Court elaborated that, “[f]or faulty workmanship to give rise to potential coverage, the faulty workmanship must result in an occurrence, that is, an unintended, unforeseen, fortuitous, or injurious event.” In so ruling, the Supreme Court overruled its earlier decision in Auto-Owners Insurance Company v. Newman, 385 S.C. 187, 684 S.E.2d 541 (2009), on the ground that the Newman opinion “permitted coverage for faulty workmanship that directly causes further damage to property in the absence of an ‘occurrence’ with its fortuity underpinnings.”

On January 26, 2011, the General Assembly introduced Senate Bill 431, which was subsequently passed as Act No. 26 of the South Carolina Acts and Joint Resolutions and ratified on May 17, 2011 upon the Governor’s signature that provided:

“(B) Commercial general liability insurance policies shall contain or be deemed to contain a definition of “occurrence” that includes:
“(1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and
“(2) property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.
“(E) This section applies to any pending or future dispute over coverage that would otherwise be affected by this section as to all commercial general liability insurance policies issued in the past, currently in existence, or issued in the future. [S.C. Code Ann. § 38-61-70 (Supp. 2011).]

On August 22, 2011, the Supreme Court changed its initial position in Crossmann I and found in favor of coverage based on an “occurrence.” See Crossmann Cmtys. of N.C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 717 S.E.2d 589 (2011) (Crossmann II). In doing so, the Court reaffirmed its decision in Newman and clarified that “negligent or defective construction resulting in damage to otherwise non-defective components may constitute ‘property damage,’ but defective construction would not.”  The Court further found that, “the expanded definition of ‘occurrence’ is ambiguous and must be construed in favor of the insured, and the facts of the instant case trigger the insuring language of Harleysville’s policies.”

ISSUES

I. Whether Act No. 26 of the South Carolina Acts and Joint Resolutions unconstitutionally violates the separation of power doctrine.

II. Whether Act No. 26 of the South Carolina Acts and Joint Resolutions is unconstitutional special legislation or deprives Petitioner of equal protection under the law.

III. Whether the retroactive application of Act No. 26 of the South Carolina Acts and Joint Resolutions unconstitutionally violates the state and federal Contract Clauses.

ANALYSIS

Petitioner implored the Supreme Court to “strike down” Act No. 26 on the ground the General Assembly was without authority to create legislation which attempts to overturn and directly control this Court’s ultimate decision in Crossmann II. Petitioner contends that in adopting the current version of Act No. 26, the General Assembly violated the doctrine of separation of powers.

The doctrine of separation of powers is succinctly stated in the South Carolina constitution:

In the government of this State, the legislative, executive, and judicial powers of the government shall be forever separate and distinct from each other, and no person or persons exercising the functions of one of said departments shall assume or discharge the duties of any other. S.C. Const. art. I, § 8. The operational effect of this doctrine is to prevent one branch of government from usurping the power and authority of another.

The Supreme Court of South Carolina concluded that the General Assembly did not violate the doctrine of separation of powers by enacting Act No. 26.  As evidenced by the procedural and legislative history, it is clear the General Assembly wrote and ratified Act No. 26 in direct response to this Court’s decision in Crossmann I.  Had Crossmann I been this Court’s final opinion, the doctrine might have been implicated.  However, given that in Crossmann II we revised our initial decision in Crossman I, we do not find that the General Assembly, in this instance, retroactively overruled this Court’s interpretation of a statute.

Harleysville asked the Court to invalidate Act No. 26 as “special legislation” because it “is narrowly drafted to favor only a small section of one particular industry.” Specifically, it claimed Act No. 26 expands coverage for “construction professionals” performing “construction related work” under a CGL insurance policy, “but would not provide the same for a non-construction professional under an identical CGL insurance contract.”

In a related argument, Harleysville asserts that Act No. 26 violates the Equal Protection Clause by “classifying and treating issuers of CGL policies differently than issuers of other types of insurance policies that make an ‘occurrence’ a prerequisite to coverage.” Additionally, it argues that the “newly imposed definition of ‘occurrence’ applies only to certain CGL policies that insure a construction professional for liability arising from construction-related work.” Ultimately, Harleysville claims there is no rational basis to warrant this differential treatment.

With respect to the prohibition against special legislation, the South Carolina constitution provides, “The General Assembly of this State shall not enact local or special laws . . . where a general law can be made applicable.”  Similarly, the Equal Protection Clauses of our federal and state constitutions declare that no person shall be denied the equal protection of the laws.

Under the rational basis test, the requirements of equal protection are satisfied when: (1) the classification bears a reasonable relation to the legislative purpose sought to be affected; (2) the members of the class are treated alike under similar circumstances and conditions; and, (3) the classification rests on some reasonable basis. If the legislation does not apply uniformly, the court must next determine the basis for that classification. It is well-settled in South Carolina that the mere fact a statute creates a classification does not render it unconstitutional special legislation. Rather, it is only arbitrary classifications with no reasonable hypothesis to support them that are prohibited.

It is well-established in South Carolina that the insurance industry is highly regulated by the General Assembly. As evidenced by this Court’s discussion in Crossmann II, insurance coverage for construction liability lacks clarity and has been the subject of significant litigation, particularly with respect to whether construction defects constitute “occurrences” under CGL insurance policies. The South Carolina Supreme Court, by ratifying Act No. 26, the General Assembly properly exercised its authority in an attempt to definitively resolve or at least minimize this frequently-litigated issue and does not constitute special legislation or violate equal protection.

Finally, Harleysville argued that the retroactive application of Act No. 26 is unconstitutional in that such application violates the state and federal Contract Clauses.

South Carolina’s constitution provides:

“No bill of attainder, ex post facto law, law impairing the obligation of contracts, nor law granting any title of nobility or hereditary emolument, shall be passed, and no conviction shall work corruption of blood or forfeiture of estate.” S.C. Const. art. I, § 4.

It is undisputed a contractual relationship existed. The court concluded that Act No. 26 substantially impairs the contractual relationship by mandating that all CGL policies be legislatively amended to include a new statutory definition of occurrence and by applying this mandate retroactively.

As a result of the holding where the court severed the unconstitutional portion from the body of the statute, which remains complete in itself, wholly independent of that which is rejected, and is of such a character that it may fairly be presumed the legislature would have passed it independent of that which conflicts with the constitution.

While the court found that Act No. 26 does not violate the separation of powers doctrine, is not unconstitutional special legislation and does not deprive Petitioner of equal protection, it concluded that the retroactivity provision of Act No. 26 is unconstitutional in violation of the state and federal Contract Clauses.  Therefore, Act No. 26 may only apply prospectively to contracts executed on or after its effective date of May 17, 2011.

ZALMA OPINION

Insurance contracts are agreements between people. In this case the state of South Carolina decided it needed to avoid litigation by changing the meaning of the word “occurrence” in a policy of insurance from that which the parties and its courts had found the language in the policy to mean.

Courts should never rewrite insurance policies. Neither should legislatures change the wording of private contracts. In this case the legislature did just that and the Supreme Court agreed that it could validly do so. By so doing the legislature and the Supreme Court of South Carolina has stepped in between the parties to a contract and changed its meaning. This is, in my opinion, a dangerous precedent.

Insurers doing business in South Carolina should amend their CGL policies issued to contractors to comport with the statute and then charge an additional premium to cover the extra losses it must pay.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Equity Protects Mortgagee Not Named In Policy

Equitable Rulings Must Be Fair

Courts of equity are not interested in damages as much as they are interested in making a ruling that is fair. The court of equity is allergic to one party taking advantage of another or profiting from innocent errors. The Marling Family Trust (“the Trust”) asked that equity be done and appealed the trial court’s grant of summary judgment in favor of Allstate Insurance Company. In The Marling Family Trust v. Allstate Insurance Company, No. 49A02-1203-CT-186 (Ind.App. 11/16/2012) and charged the Indiana Court of Appeal with determining whether the trust had an equitable right to the proceeds of the Allstate policy even though it was not named in the policy as an insured or as a mortgagee.

Insurance law only obligates an insurer to pay indemnity to persons with whom it contracted or who it promised to pay in the event of a covered loss. The Trust recognized that it was not a party to the contract and that Allstate never promised to pay it indemnity in the event of a loss. It argued, however, that it would be unfair to allow Allstate to avoid payment and put the expense of a loss on the Trust.

FACTS

In January 2006, as security for a promissory note in favor of the Trust, Pipes granted the Trust a second mortgage on his home (“the property”) on West Henry Street in Indianapolis. The mortgage agreement required Pipes to insure the property against loss or damage from fire, lightning, flood, and other common casualties, for the benefit of the Trust. Pipes obtained a “deluxe homeowners” insurance policy through Allstate. The policy period began May 20, 2007, and ended on May 20, 2008. In the event of a loss, the policy required the policyholder-or mortgagee, if the policyholder did not file a claim-to “promptly give [Allstate] or our agent notice.”  The policy also provided that any suit or action against Allstate must be brought “within one year after the inception of loss or damage.”  Notably, Pipes failed to name the Trust as a mortgagee in the Allstate policy.

When Pipes lost the property in foreclosure, the Trust bought it in a Sheriff’s sale on January 16, 2008. Shortly after the Trust took possession of the property, it discovered significant interior water damage. On February 25, 2008, counsel for the Trust sent Allstate a letter notifying it that the Trust had purchased the property and discovered water damage. The letter also informed Allstate of the following:

the Trust held a second mortgage on the property when the damage occurred, the Allstate policy was in effect when the damage occurred, the first mortgagee on the property, Washington Mutual, was named as an additional insured on the policy, and the Trust had reimbursed Washington Mutual for their interest in the property. As a result, the Trust asserted a claim under Pipes’ policy for payment to cover the loss caused by the water damage. It was subsequently confirmed that the damage had occurred before the Sheriff’s sale and that the Trust had not been aware of the damage when it purchased the property.

Three months later, an Allstate claims adjuster notified the Trust that the claim was being reviewed. The adjuster also noted that Allstate’s policyholder was Pipes, with no additional insured listed on the policy. Allstate ultimately refused to distribute policy proceeds to the Trust.

The Trust brought suit against Allstate and eventually Allstate moved for summary judgment, contending, in relevant part, that the Trust had not acquired an equitable lien on the policy proceeds as it claimed. After taking the matter under advisement, the trial court granted Allstate’s summary-judgment motion without issuing findings of fact or conclusions of law.

ANALYSIS

On appeal, the Trust contends that the trial court erred in granting summary judgment in favor of Allstate. The Trust argued that the court failed to recognize that Pipes’ duty to insure the property for the Trust’s benefit gave rise to an equitable lien in the Trust’s favor, thereby entitling it to insurance proceeds under Pipes’ Allstate policy.

In Indiana, where a positive duty is imposed upon the mortgagor to insure for the benefit of the mortgagee, the mere existence of the duty is sufficient to impress upon the proceeds of any policy taken out by the mortgagor an equitable lien in favor of the mortgagee. Once the insurer has notice of the mortgagee’s rights it is considered to have a duty to treat the proceeds of the policy as though the provision that the proceeds should be payable to the mortgagee were written into the policy. The principle is that equity will treat as done that which should have been done. The Trust’s mortgage agreement with Pipes required Pipes to insure the property for the benefit of the Trust as mortgagee. The Trust acquired an equitable lien on the policy proceeds.

Allstate argued that at the time it received notice of the Trust’s mortgagee status and the loss, the property had been foreclosed upon and the Trust had purchased it; thus, the Trust was no longer mortgagee and cannot invoke the equitable-lien theory. The Indiana appellate court noted that it is well established in Indiana that the rights of the mortgagee to the insurance proceeds are determined as of the time of the loss. Therefore, a foreclosure action brought after the loss will not necessarily affect the insurer’s liability to the mortgagee.

The Trust was required to give notice of its interest to Allstate before Allstate distributed the policy proceeds. This requirement of earlier precedent is necessary to protect insurers from the possibility of double payments-one payment to an improper party and another to a previously unknown mortgagee. There is no danger that Allstate will have to dig into its pocket twice for the same claim. In February 2008, the Trust gave Allstate notice of its interest before Allstate distributed any policy proceeds; indeed Allstate has never paid anyone any amount on this claim.

The appellate court concluded, therefore, that the trial court erred in granting summary judgment in favor of Allstate. The Trust’s mortgage agreement with Pipes required Pipes to insure the property for the benefit of the Trust as mortgagee. This is sufficient to give rise to an equitable lien in the Trust’s favor.  The Trust protected its equitable interest in the policy proceeds by informing Allstate of its mortgagee status before any policy proceeds were distributed. Thus, to the extent that the loss is otherwise covered under the terms of Pipes’ insurance policy, the Trust may recover policy proceeds.

ZALMA OPINION

The only reason a mortgagee has a right to proceeds under a first party property policy is to protect its interest as a mortgagee. The opinion here states that the Trust purchased the property at the foreclosure sale, made good the first mortgage, but does not state what it paid for the property.

If the Trust made a full credit bid (that is it paid the full amount of its debt) when it acquired the property at the Sheriff’s sale, the effect of a full credit bid is to satisfy the debt, any lien on the insurance proceeds is extinguished. (4 Miller & Starr, Cal. Real Estate (3d ed. 2000) § 10:61, p. 189; see also Countrywide Home Loans, Inc. v. Tutungi, 66 Cal. App. 4th 727, 731 (1998) [‘lender is not entitled to the proceeds of insurance for damage to the property, because the lender’s only erstwhile interest in the insurance was as security for the debt, now discharged’]; Altus Bank v. State Farm Fire and Cas. Co., 758 F. Supp. 567, 571 (C.D. Cal. 1991): “A mortgagee’s insurable interest under an insurance policy is limited to the amount of the debt paid. Once the debt has been fully extinguished by the full credit bid, so has the insurable interest.”

Since the claim in this case happened before the claim the right to the proceeds belonged to the named insured and the first mortgagee. Both gave up their rights so equity required Allstate to pay the trust. If, however, the Trust, purchased the property with a full credit bid it would have had its insurable interest fully satisfied by the sale and would have no right to the proceeds.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Go Directly to Jail

Arson For Profit Proved

Arson for profit is the most dangerous form of insurance fraud because firefighters, neighbors, and innocent bystanders can be injured or killed as a result of an arson fire. In South Dakota, Dawn Hannemann was convicted of arson in connection with a fire in her apartment. She appealed arguing that the circuit court abused its discretion:

  1. in denying her motions for judgment of acquittal and new trial based on a claim of ineffective assistance of trial counsel; and
  2. by excluding an out-of-court statement made by her estranged sister.

In State of South Dakota v. Dawn Hannemann, 2012 S.D. 79 (S.D. 11/20/2012) the Supreme Court decided that the conviction was appropriate and her attempt to place the blame on her sister through hearsay statements were unconvincing.

Facts

On the night of October 31, 2010, Hannemann was alone in her Watertown apartment that she shared with her teenage son. She had taken her son to visit her daughter in Fargo, North Dakota. In the early morning hours of November 1, 2010, a fire started on the first floor of the apartment. Hannemann testified that she attempted to exit through the front door on the first floor. But because of heavy smoke, she opened a second-story-bedroom window, screamed for help, and jumped, injuring herself. Emergency responders arrived, Hannemann was transported to a hospital, and firefighters extinguished the fire.

The Watertown Fire Department, Allstate Insurance Company (Hannemann’s insurer), and Midwest Family Mutual Insurance Company (the apartment owner’s insurer) conducted simultaneous investigations. The Allstate and Midwest investigators believed that the fire had been intentionally set. One Allstate investigator collected carpet samples and sent them to a chemist to be tested for ignitable liquid residue. Another Allstate investigator sent Hannemann’s computer to an electrical engineer to determine whether it played a role in the fire. The Midwest investigator sent the smoke alarms and an electrical outlet from the apartment to a second electrical engineer for analysis.

Hannemann’s court-appointed attorney requested a court-appointed computer expert and made a lengthy discovery motion. Counsel did not request a court-appointed fire investigator, electrical engineer, or chemist. Additionally, counsel did not obtain independent testing of the carpet samples or electrical devices, and counsel did not make a Daubert motion to challenge the reliability of the State’s experts’ opinions.

During the course of a three-day jury trial, the three fire investigators employed by Allstate and Midwest testified that the fire had been intentionally set. The two electrical engineers testified that the electrical devices in the apartment had not caused the fire. The chemist testified that the carpet sample from the fire’s place of origin contained residue from an ignitable accelerant, while samples from other places in the room did not.

Additional evidence also suggested arson. The smoke detectors in the apartment were hard-wired to a circuit breaker with back-up battery power in case of electrical failure. Analysis of these systems revealed that the electrical circuit for the smoke detectors had been turned off and the back-up batteries for three of the four smoke alarms had been removed. Fire investigators also noted that a substantial amount of Hannemann’s clothing, shoes, and decorative wall hangings had been removed prior to the fire.

After the fire, Hannemann filed a $53,000 insurance claim for damage caused by the fire.

Shortly after the fire, Hannemann told law enforcement that she had not touched the smoke detectors in the apartment. At trial, however, Hannemann admitted that she may have removed a battery. Hannemann also admitted that she had browsed the Internet on the night of the fire. Evidence from Hannemann’s computer revealed Internet searches on smoke alarms, renter’s insurance, house fires, and Allstate’s insurance coverage in South Dakota.

The jury found Hannemann guilty of arson by starting a fire with intent to destroy or damage property in order to collect insurance. After trial, Hannemann obtained a new court-appointed attorney who moved for a judgment of acquittal and new trial, claiming ineffective assistance of trial counsel.

Decision

To prevail on a claim of ineffective assistance of counsel, a defendant must show that his counsel provided ineffective assistance and that he was prejudiced as a result. Ultimately, the question is whether there is a reasonable probability that, absent the errors, the factfinder would have had a reasonable doubt respecting guilt.

Hannemann argued that trial counsel was sufficiently deficient on a number of matters to permit review on direct appeal. Hannemann first contends that counsel was deficient in failing to secure an arson expert. Hannemann argues that without an arson expert, trial counsel was unable to properly challenge the admissibility of the State’s scientific evidence through pre-trial motions and cross- examination.

Conflicting evidence presented the appellate court with the following factual disputes:

  1. whether the scene was properly preserved;
  2. what inferences should have been drawn from the presence or absence of accelerant containers;
  3. whether there was adequate testing of the identified accelerant; and
  4. whether appropriate fire investigation protocols were followed. Further, Hannemann testified that she believed the perpetrator was her estranged sister, Ashley Tofteland.

Accordingly, trial strategy may have been the motivation for trial counsel’s failure to utilize an arson expert witness to challenge the State’s scientific evidence indicating that the fire was intentionally set. Hannemann also contends that trial counsel was ineffective in failing to properly subpoena Briggs, her mother. Hannemann and her mother, in support of a new trial motion, testified to the strained relationship with Tofteland. Therefore, even if trial counsel’s failure to properly serve Briggs was ineffective assistance under prevailing norms, the direct appeal record does not demonstrate prejudice; i.e. that Briggs’s testimony would have changed the result of the trial.

Hannemann further contends that trial counsel was ineffective in failing to demonstrate a potential bias of the fire investigators hired by the insurance companies. Hannemann contends that the investigators employed by the insurers had a financial interest in finding that the fire was intentionally set. Although trial counsel did not cross-examine those experts regarding the entities that employed them, the fire investigators disclosed that information in their direct examination. Therefore, Hannemann has not demonstrated that failing to ask about the same information on cross-examination was ineffective assistance or that it was prejudicial.

In Hannemann’s case, there existed inculpatory evidence not involving alleged trial errors. Further, most of trial counsel’s decisions could have involved trial strategy. Finally, as previously noted, Hannemann’s post-trial evidence raises disputes of fact relating to the ineffective assistance and prejudice claims that can only be resolved through a habeas hearing.

ZALMA OPINION

Hindsight over trial strategy does not constitute inadequate counsel. In this case counsel tried to do what the client, Hannemann, wanted: to defend her case by blaming her sister. The attempt failed but it was a strategic decision. Further, the evidence of Hannemann’s guilt was overwhelming and none of the evidence, with hindsight, Hannemann claimed her lawyer should have presented, would not have changed the decision of the trier of fact.

Arson is a stupid way to commit insurance fraud since there is always evidence left like the disabled smoke detectors in this case. Hannemann almost killed herself in this fire, could have killed or injured other residents of her apartment building and the firefighters. Her conviction was affirmed and I can only hope she received a serious sentence.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Insured Must Establish a Covered Loss Occurred

Don’t Sue an Insurer Without Evidence

The person insured by a first party property policy has a simple duty to fulfill as a condition precedent to recovery of indemnity under the policy. The duty requires that the insured show that the property, the risk of loss of which was insured, suffered damage from an insured against peril. In Ruth McGhan v. Farmers Insurance Exchange, No. NUMBER 13-11-00433-CV (Tex.App. Dist.13 11/21/2012) the Texas Court of Appeal was asked to reverse a summary judgment obtained by Farmers because there was no evidence of a covered cause of loss.

McGhan claimed to the Texas Court of Appeal that the trial court erred in granting summary judgment because Farmers failed to conduct a reasonable investigation of her claim because no representative from Farmers inspected the damage to McGhan’s 3,500 square foot roof.

BACKGROUND

Farmers was first named as a defendant by McGhan’s third amended petition in which she asserted that Farmers denied her claims in July and September of 2007 because the claims were not covered losses. This petition asserted claims of breach of contract, bad faith, deceptive trade practices, and negligence. In McGhan’s fourth amended petition, filed after the summary judgment was heard, McGhan alleged for the first time that no representative of Farmers adequately inspected the roof when she made her claims in 2007. Her causes of action against Farmers remained the same as alleged in the third amended petition.

Farmers moved for summary judgment. As summary judgment evidence, Farmers attached the policy of insurance, the oral deposition of McGhan, denial letters issued by Farmers, a letter issuing payment to McGhan for roof damage in 2008, post-Hurricane Ike, the affidavit of Carlos Rodriguez of CHR Roofing, and a property inspection report prepared by Jerald Brown.

Farmers asserted that there was no evidence that Farmers breached its contract with McGhan or acted in bad faith or violated any of the provisions of Texas’ deceptive trade practices act.

The facts are that Farmers denied claims of damage based on claims made in July and August of 2007. The July 9, 2007 denial letter said that their investigation revealed that the roof showed signs of wear and tear in the form of flashing failure and the water damage was a result of a slow intermittent leak, but no storm damage was found. The policy provided that loss covered by rain, whether or not driven by wind was excluded from coverage unless the direct force of wind or hail made an opening in the roof or wall and water entered through the opening causing damage.

The denial letter based upon the August claim stated that the investigation showed signs of wear and tear in the form of flashing failures, but no storm damage was found. The letter noted that flashing failures were specifically excluded under the policy. The letter also noted that there were no storm related openings found in the roof or the walls.

ANALYSIS

McGhan’s sole complaint on appeal regarding her July and August 2007 claims is that a Farmers’ representative denied her claim without actually getting on her roof ignoring the fact that representatives of Farmers did get on the roof.

She based her allegations of wrongdoing by Farmers by her own testimony that she did not know if there was storm related damage to the roof because she did not get on the roof. She said that someone named Jason Anderson, a metal roof expert, told her that there was storm related damage. Anderson told her that there was significant damage to the roof in various places and “that it could definitely be responsible for the-leaks we were finding.”

She further testified that someone named Patrick from Farmers came out to her home, looked at the roof and told her that he did not find any storm created damage that was causing the leak. She said that he did not get on the roof during his inspection. She was not sure why Jason Anderson thought there might be coverage.

Farmers properly objected to McGhan’s summary judgment evidence, stating that Jason Anderson had not been properly or timely designated as a witness and any of plaintiff’s statements with respect to what he said would also be hearsay. McGhan’s testimony, with respect to what Anderson might have said is not only hearsay it is without probative force because there is no indication that he was actually an expert or that any testimony he would have given would have been reliable.

The Court of Appeal agreed with the trial court and affirmed the summary judgment in favor of Farmers.

ZALMA OPINION

This case teaches clearly two important requirements an insured must fulfill before being able to collect on a policy of first party property insurance:

FIRST: The insured must prove that there is a loss caused by an insured against peril since no insurance policy covers every possible damage caused to real or personal property.

SECOND:  The proof must consist of evidence not supposition or hearsay.

McGhan failed to do either.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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ACA Tax Breaches First Amendment

Government Can’t Force Religious Institution to Violate Religious Precepts

Can the United States Compel a religious institution that is not a church to provide services to its employees when doing so would violate their religious principles? At least in one case presented to the United States District Court for the District of Columbia the answer was “no, it may not.” The USDC was asked by Tyndale House Publishers, Inc. and its president and CEO, Mark D. Taylor to relieve them from the application of the regulations and penalties relating to an employer’s obligation to cover contraceptives under an employer health plan pursuant to the Patient Protection and Affordable Care Act (the “ACA”), as violating the Religious Freedom Restoration Act (“RFRA”), 42 U.S.C. § 2000bb-1 (2006), the Free Exercise, Establishment, and Free Speech Clauses of the First Amendment, U.S. Const. amend. I, the Due Process Clause of the Fifth Amendment, U.S. Const. amend. V, and the Administrative Procedure Act (“APA”), 5 U.S.C. §§ 553(b)-(c), 706(2)(A), 706(2)(D) (2006) in Tyndale House Publishers, Inc., et al v. Kathleen Sebelius, Secretary, No. 12-1635 (D.D.C. 11/16/2012).

BACKGROUND

A. The Affordable Care Act

Enacted in March 2010, the ACA requires group health plans to provide women with “preventive care and screenings” without imposing any cost-sharing requirements on the plan beneficiaries. Specifically, the ACA requires that non-grandfathered group or individual health plans and health insurance issuers cover without imposing any cost sharing requirements such additional preventive care and screenings for women as provided for in comprehensive guidelines supported by the Health Resources and Services Administration [("HRSA")].”

The Department of Health and Human Services (“HHS”) tasked the Institute of Medicine (“Institute”) with developing recommendations to implement the requirement to provide preventive services for women. The HRSA adopted the Institute’s recommendations on August 1, 2011, which included a provision requiring “the full range of [FDA]-approved contraceptive methods, sterilization procedures, and patient education and counseling for women with reproductive capacity.” HHS subsequently promulgated regulations implementing the Institute’s recommendations, under which all health insurance plans and policies (except those grandfathered or otherwise exempt) are required to comply with the contraceptive coverage mandate starting with the plan years beginning on or after August 1, 2012.

Among other exemptions, the regulations exempt from the contraceptive coverage mandate certain “religious employers,” defined as employers having each of the following characteristics:

  1. The inculcation of religious values is the purpose of the organization.
  2. The organization primarily employs persons who share the religious tenets of the organization.
  3. The organization serves primarily persons who share the religious tenets of the organization.
  4. The organization is a nonprofit organization as described in section 6033(a)(1) and section 6033(a)(3)(A)(i) or (iii) of the Internal Revenue Code of 1986, as amended.

Employers subject to the contraceptive coverage mandate face fines, penalties, and enforcement actions for non-compliance. Civil enforcement actions by the Department of Labor and insurance plan participants); 26 U.S.C. § 4980D(a), (b) provides a penalty of $100 per day per employee for noncompliance with coverage provisions of the ACA.

B.The Plaintiffs’ Factual Allegations

The first named plaintiff, Tyndale House Publishers, Inc. (“Tyndale”), is a Christian publishing company founded in 1962 by Dr. Kenneth Taylor and his wife, Margaret Taylor. Tyndale is 96.5% owned by the Tyndale House Foundation (the “Foundation”), a nonprofit religious entity. Of the shares owned by the Foundation, “just over 8.4%” are voting shares. The same group of individuals serves both as the trustees of the Tyndale Trust and as the board of directors of Tyndale House Publishers, and each individual is “required to sign a Statement of Faith each year to show that they hold certain religious beliefs, which are typically described as evangelical Christian beliefs.”

The contraceptive coverage mandate requires the plaintiffs to provide and pay for drugs and devices that violate their religious beliefs, and subjects Tynsdale to heavy fines and penalties if they choose not to violate those beliefs.  In particular, the plaintiffs are required to pay for drugs or devices that can cause the demise of an already conceived/fertilized human embryo.

The plaintiffs moved for a preliminary injunction. They asserted that they face imminent harm because their refusal to comply with the ACA will subject them to the contraceptive coverage mandate’s draconian penalties. The plaintiffs represent that they cannot afford to sustain the fines threatened by the contraceptive coverage mandate.

ANALYSIS

The plaintiffs’ submissions to the Court indicate that all five Tyndale entities, as well as their directors, trustees, and even many of their employees, share the same religious beliefs. Tyndale’s Articles of Incorporation declare that its purpose is to engage as a publisher of Christian and faith-enhancing books. Its Corporate Purpose is to minister to the spiritual needs of people, primarily through literature consistent with biblical principles. Tyndale holds a weekly chapel service for its employees; although attendance is voluntary, well over 50% of the employee population attends each week. Christian prayer is also a routine practice at meetings of Tyndale’s executives and board of directors.

The beliefs of Tyndale and its owners are indistinguishable. Nor is there any dispute that Tyndale’s primary owner, the Foundation, can “exercise religion” in its own right, given that it is a non-profit religious organization; indeed, the case law is replete with examples of such organizations asserting cognizable free exercise and RFRA challenges.

B. Likelihood of Success on the Merits

The RFRA forbids the government from “substantially burden[ing] a person’s exercise of religion even if the burden results from a rule of general applicability” unless the government can “demonstrate[] that application of the burden to the person (1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest.” 42 U.S.C. § 2000bb-1(a), (b). The stringent requirements imposed by the RFRA reflect Congress’ judgment that governments should not substantially burden religious exercise without compelling justification and are intended to restore the compelling interest test.

To determine whether the contraceptive coverage mandate substantially burdens the plaintiffs’ religious exercise, the Court must consider whether the government action “puts ‘substantial pressure on [the] adherent[s] to modify [their] behavior and to violate [their] beliefs.'”

The contraceptive coverage mandate affirmatively compels the plaintiffs to violate their religious beliefs in order to comply with the law and avoid the sanctions that would be imposed for their noncompliance. The contraceptive coverage mandate places the plaintiffs in the untenable position of choosing either to violate their religious beliefs by providing coverage of the contraceptives at issue or to subject their business to the continual risk of the imposition of enormous penalties for its noncompliance.

A substantial burden exists when government action places substantial pressure on an adherent to modify his behavior and to violate his beliefs. The plaintiffs’ specific objection is not simply to the use of the contraceptives at issue, but to providing coverage for abortifacients and related education and counseling in Tyndale’s health insurance plan. Therefore, the requirement to provide such coverage directly burdens the plaintiffs’ religious objection to providing such coverage.

If a plaintiff demonstrates a substantial burden on its religious exercise, the RFRA requires that the government then demonstrate that it has “a compelling governmental interest” justifying the burden.  At the preliminary injunction stage, as at trial, the burden is on the government to demonstrate a compelling interest.

The defendants must show that requiring the plaintiffs to provide the contraceptives to which they object and intrauterine devices as well as education and counseling regarding the same-will further the government’s compelling interests in promoting public health and in providing women equal access to health care.

The court concluded that the plaintiffs have shown a strong likelihood of success on the merits of their RFRA claim.

C. Irreparable Harm

It is well settled that the loss of First Amendment freedoms, for even minimal periods of time, unquestionably constitutes irreparable injury. Elrod v. Burns, 427 U.S. 347, 373 (1976). By extension, the same is true of rights afforded under the RFRA, which covers the same types of rights as those protected under the Free Exercise Clause of the First Amendment.

D. The Balance of Equities

The court concluded that the defendants have not carried their burden of persuading the Court that the government must ensure that these particular plaintiffs provide their employees with the specific contraceptives at issue in order to advance the government’s stated compelling interests.

E. Public Interest

Although there is arguably a public interest in the uniform application of the ACA and the contraceptive coverage mandate, there is undoubtedly also a public interest in ensuring that the rights secured under the First Amendment and, by extension, the RFRA, are protected. Indeed, First Amendment rights are among the most precious rights guaranteed under the Constitution. Where the regulations at issue include exemptions and other provisions excluding a large number of people from the scope of the regulations, and the government has failed to show a compelling interest furthered by the enforcement of those regulations as to the plaintiffs in this case, the public has little interest in the “uniform application” of the regulations. The public interest instead weighs in favor of the plaintiffs.

IV. CONCLUSION

For the reasons set forth above, the plaintiffs’ motion for a preliminary injunction is granted.

ZALMA OPINION

The ACA, also known as Obamacare, will continue to keep lawyers and courts busy as regulations are written to enforce the intent of the law. The decision of the District of Columbia court was detailed and clear with citations to statutes, the U.S. Constitution and case law that led it to the simple conclusion that the threat of fines of $100 a day for each of Tyndale’s 450 employees would put them to a “Hobson’s Choice” of violating their religious principles or go out of business attempting to pay the fines. That such a choice is a clear and unambiguous violation of the First Amendment’s requirement that the U.S. make no law that prohibits the free exercise of religion.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Appraisal is A Condition Precedent

It is Counterproductive to Sue Before Appraisal

Appraisal in first party insurance contracts is a condition of the standard fire policy that allows disputes over the amount of loss arises it can be resolved by three independent appraisers. It is designed as a condition precedent where no suit can be filed until the appraisal is completed. This clause exists because, once the amount of loss is resolved, there should be no need for litigation. In First Protective Insurance Company v. Schneider Family Partnership, No. 2D11-3037 (Fla.App. 11/14/2012), First Protective Insurance Company (“FPIC”) appealed the order granting a partial summary judgment in favor of the Schneider Family Partnership (“Schneider”) and denying FPIC’s motion to compel an appraisal under a homeowner’s insurance policy.

FACTS

Schneider filed a claim with its insurer, FPIC, to recover for damages its property sustained during Hurricane Wilma. FPIC acknowledged Schneider’s policy covered the loss; however, the parties could not agree on the amount of damages. Consequently, FPIC invoked the appraisal provision in the insurance contract. Prior to completion of the appraisal process, and after an unsuccessful attempt at mediation, Schneider sued FPIC seeking damages for breach of contract and bad faith. Schneider also sought a declaratory judgment that FPIC was not entitled to an appraisal. FPIC moved to dismiss the action citing a policy provision stating that no lawsuit could be filed against it until the insured had complied with all policy conditions, including appraisal. The trial court denied, in part, FPIC’s motion to dismiss, abated the action, and ordered the parties to complete the appraisal process.

For the purposes of this appeal we do not need to detail the procedural jockeying that followed the court’s order to complete the appraisal process. The upshot was that the appraisal process was never completed, the litigation resumed, and FPIC, still attempting to assert its right to an appraisal, moved for summary judgment arguing it was contractually entitled to an appraisal as a condition precedent to Schneider’s suing. It also renewed a prior motion to compel an appraisal and alleged that the parties’ dispute was not related to coverage but rather to the cause and amount of damage.

The trial court agreed with Schneider’s interpretation of Florida statutes and denied FPIC’s amended motion for summary judgment and renewed motion to compel an appraisal. On appeal, FPIC argues that in granting Schneider declaratory relief, the trial court erred by relying on an administrative rule that not only improperly expands the express language of the statute but deprives it of its right to an appraisal under the contract.

ANALYSIS

Florida statute, Section 627.7015 provides an alternative procedure for resolution of disputed property insurance claims. The purpose of the statute is to use mediation to resolve insurance claim disputes before resorting to the appraisal process or litigation. Under the version of the statute in effect when the parties entered into the contract, the insured was not required to submit to an appraisal before suing the insurer if the insurer requested mediation and the results of the mediation were rejected by either party. Here, the record shows that Schneider, not FPIC, requested mediation. Because the statute does not address a situation where the insured requests mediation and the parties cannot reach an agreement, we conclude that under the statute FPIC is entitled to pursue an appraisal pursuant to the terms of the contract.

In holding otherwise, the court relied on an administrative rule that if an insured chooses not to participate in mediation or if the mediation is unsuccessful, the “insured may choose to proceed under the appraisal process set forth in the insured’s insurance policy, by litigation, or any other dispute resolution procedure available under Florida law.”

The Florida Court of Appeal concluded that reliance on such an administrative rule is error in that it improperly modifies and expands section 627.7015 by providing the insured with an option to resolve disputed property insurance claims not envisioned by the statute.

Because the insurance contract provided for the appraisal process and FPIC did not waive its right to an appraisal under the relevant statute, the trial court erred in entering summary judgment for Schneider and in denying FPIC’s renewed motion to compel the appraisal.  The trial court was reversed and the trial court was directed to grant FPIC’s motion and compel the appraisal.

ZALMA OPINION

When there is no question of coverage but there is a dispute between the insured and the insurer on the proper amount needed to indemnify the insured Florida allows for mediation and appraisal before the parties may proceed to litigation. People involved in a first party claim, public insurance adjusters, independent insurance adjusters, company employed insurance adjusters, and their lawyers should work together to resolve the claim amicably. If they cannot agree mediation is available in Florida and if that doesn’t work, appraisal, with three independent and unbiased appraisers, acting like arbitrators, can establish the amount of loss quickly and less expensively than litigation. It is counterproductive to seek litigation first before making every effort to resolve the claim.

The Florida Court of Appeal recognized the importance of the appraisal condition precedent and properly enforced it.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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THANKSGIVING

What I am Thankful For

My family and I have much to be thankful for this year, not the least of which is you, my friends, clients and readers of my blog, Zalma’s Insurance Fraud Letter, and my other writing.

Although this has been a difficult year for most of the country, storms have caused hardship in many parts of the country, we Americans celebrate Thanksgiving to give thanks for the good things in life at least once a year.

I can give thanks for:

  • My wife of 45 years who I have loved since she was 9 and I was 12 when we first met and who still love me.
  • My three adult children who are successes in their own right.
  • That my three children and one grandson live nearby and put up with my wife and I.
  • My clients who, for the more than 40 years have allowed me to earn a living doing what I love to do.
  • My country for giving me a place to live and work in peace.
  • Those of you who read what I write.
  • Those of you who find what I do and write is useful.
  • Seventy years of mostly good health.
  • That I can continue working at a reduced rate of only 40 hours a week.
  • The joy of being an empty nester who can finally spend alone time with my beautiful wife.
  •  The hundreds of friends I have never met but with whom the Internet has allowed me to communicate in parts of the world I have never visited.
  • My publishers and editors who help me make whatever I write intelligible and in proper English.
  • The wonder of the Internet that allows me to publish E-books instantly on line.

When I started practicing law in 1972 technology allowed a typewriter to erase errors from the keyboard, legal research was done in a large library and took days to find support for an issue, and it three secretaries to keep up with my dictation. Now, I can do the same legal research in 30 minutes on line, need no secretary, and can operate my law firm and consulting business with no employees.

On this Thanksgiving weekend remember that it is more important to think about your blessings and those things that you have to be thankful for than to get in line for “Black Friday” or to buy an inexpensive flat screen t.v. or tablet computer.

 

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Limited Proof of Loss Waiver for Flood Re Hurricane Isaac

The letter from FEMA allowing for a limited extension of the National Flood Insurance Policy Proof of Loss requirement can be read in full at http://www.nfipiservice.com/Stakeholder/pdf/bulletin/w-12100.pdf.

With this example, the NFIP policyholder who incurred a flood loss on August 25, 2012, must send proof of loss no later than January 22, 2013.

This does not effect people who have suffered from Hurricane Sandy whose victims should ask for a similar extension.

 

 

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Never Volunteer

ALWAYS OWN UP TO YOUR MISTAKE

The New Jersey Superior Court, Appellate Division was called upon to resolve a dispute that arose from a trial court decision that ARI Mutual Insurance Company (ARI Mutual) was obliged to reimburse AIG Centennial Insurance Company (AIG) for personal injury protection (PIP) medical expense benefits paid to AIG’s insured.  In AIG Centennial Insurance Company v. Gregory R. Thompson D/B/A Thompson Trucking, No. A-4358-11T2 (N.J.Super.App.Div. 11/19/2012) AIG attempted to recover money it paid in error from a tortfeasor’s insurer.

FACTS

The dispute between the insurers grew from an automobile accident that occurred on September 11, 2006. On that date, Dorothy Davis was the driver of a private passenger automobile owned by Sherman Harris, AIG’s named insured. According to a police report, Davis’s vehicle was struck by a dump truck operated by William H. Kanauss, III, a driver for Thompson Trucking.

At the time of the accident, Thompson Trucking’s liability insurer was ARI Mutual. Because the dump truck was a commercial vehicle there was no PIP coverage provided by ARI Mutual’s Business Auto Policy, except for injuries suffered by pedestrians. Harris, however, had procured from AIG a basic automobile insurance policy that provided PIP medical expense coverage of $15,000 per person, per accident.

By letter dated September 18, 2006, AIG mistakenly notified Davis that Harris’s policy provided her with PIP coverage of $250,000. After submitting her written application for PIP benefits to AIG on September 25, 2006, Davis relied on AIG’s $250,000 representation and obtained medical treatment costing far in excess of the basic automobile insurance policy’s $15,000 PIP medical expense limitation. AIG eventually realized that it had mistakenly advised Davis about the policy’s limit of liability and declined to provide further PIP benefits beyond what it had already expended. ARI Mutual reimbursed AIG $15,000 pursuant to New Jersey Statutes.

Davis filed a personal injury lawsuit against Kanauss, Gregory Thompson, and Thompson Trucking (the Thompson defendants) in August 2008. ARI Mutual provided a defense to the Thompson defendants pursuant to its Business Auto Policy.

In December 2009, Davis commenced a separate action against AIG, ARI Mutual, and the Thompson defendants, which sought, among other things, a declaration that “AIG is to afford coverage for any medical and/or hospital expenses up to $250,000 under the policy it issued and defendant AIG should be estopped from denying PIP benefits in excess of $15,000.” The complaint also sought a judgment “declaring that defendant AIG’s policy is reformed to include PIP coverage in the amount of $250,000.”

Although AIG and ARI Mutual were co-defendants in Davis’s declaratory judgment action, they did not file cross-claims against each other relating to the ultimate responsibility for PIP payments under the statute.

In October 2010, Davis settled her personal injury lawsuit against the Thompson defendants for $225,000. In March 2011, Davis’s claims against ARI Mutual and the Thompson defendants in the declaratory judgment action were dismissed. In like vein, but on a date not disclosed in the record, Davis separately settled her dispute with AIG, wherein AIG agreed to pay for all of Davis’s requested PIP expenses. The record is silent about the specific details concerning that settlement. AIG refers to having “reformed” the insurance contract, but it does not appear that Harris was a party to the “reformation” of his basic automobile insurance policy.

On April 28, 2011, AIG demanded reimbursement from ARI Mutual for the PIP benefits paid on Davis’s behalf in excess of $15,000, a sum totaling $75,634.29. On May 4, 2011, ARI Mutual declined to reimburse AIG for any amounts in excess of the $15,000 it had already paid.

AIG filed the present lawsuit seeking (1) money damages against the Thompson defendants and (2) reimbursement or arbitration of AIG’s dispute against ARI Mutual. After consideration of the parties’ motions for summary judgment, the trial court dismissed all of AIG’s claims against the Thompson defendants. In denying ARI Mutual’s motion, the court granted AIG’s application to not cap reimbursement at $15,000, and directed the insurers “to submit [AIG's] claim for reimbursement to binding arbitration.”

ANALYSIS

PIP reimbursement to a PIP carrier is strictly governed by statute in New Jersey.

ARI Mutual recognizes its responsibility to reimburse AIG for the $15,000 PIP medical expense benefit provided in Harris’s basic automobile insurance policy pursuant to statute. ARI Mutual objected to paying more simply because of AIG’s initial mistake and subsequent unilateral settlement with Davis.

While acknowledging its error, AIG argues that ARI Mutual nevertheless should be responsible for reimbursing PIP medical expense amounts in excess of the basic automobile insurance policy limit because if AIG had hewed to the $15,000 limit, ARI Mutual would have been exposed to Davis’s claim for the difference as part of the personal injury action. That may theoretically be true, but the appellate court cannot be engaged in an equitable redistribution divorced from the Legislature’s intent. Instead, it must be involved with a purely statutory reimbursement scheme between insurers.

AIG’s payment of up to $250,000 was not made within the confines of the basic automobile insurance policy covering Davis. Instead, it was an ad hoc adjustment that suited AIG’s litigation strategy.

The appellate court concluded that the payment was not made “pursuant to” or “in accordance with” the PIP reimbursement statute. The payment was made because AIG was potentially estopped from doing otherwise after providing representations to Davis for up to $250,000 in PIP benefits, upon which Davis reasonably relied. The appellate court also found that ARI Mutual was not involved in perpetrating the mistake; it was an operational gaffe made by AIG alone in the administration of its insurance business. If AIG’s argument is applied the result would be unreasonable and abruptly increase the exposure of ARI Mutual to compensate AIG for its own error.

The legislative intent of PIP benefits is clear. They enable persons injured on our streets and highways to get medical treatment and payment quickly, within the coverage limits designated in the policy, and without regard to fault. Furthermore, the Legislature ensured that carriers could obtain reimbursement from a tortfeasor’s insurer directly, to facilitate cost containment, rather than endure a cumbersome subrogation process. The Legislature never indicated, let alone enacted a statute, that a tortfeasor’s insurer should also be exposed to liability due to one-sided errors made by the injured’s insurer.

A court should never presume that the Legislature intended something other than that which it clearly and plainly expressed in plain language. To do otherwise would be tantamount to rewriting the Legislature’s written enactment by judicial fiat. Therefore, from a public policy standpoint, allowing AIG to recover the amount in question from ARI Mutual would condone sloppiness by insurers and increase the cost of insurance in direct contravention of our no fault laws.

ZALMA OPINION

When a West Point student errs he or she is required to respond: “No excuse, sir” and accept the punishment the error deserves. When a mistake is made by an insurer that causes it to pay more than it owes the insurer should result in the same response. Since AIG admitted that the error was made and was made by it alone it should have accepted the loss caused by the error and avoided this contumacious litigation.

Rather, AIG, showing a remarkable amount of “chutzpah” made an error that cost it $250,000. Rather than accepting responsibility for its error it had the unmitigated gall to seek reimbursement of its erroneous payment from another insurer who had nothing to do with the error.

Courts should not, and in this case clearly would not, honor the claims of a volunteer who pays a claim it does not owe by passing that error to another.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Serious Injuries Make Interesting Law

UIM and Auto Liability Aggregate

Under Arkansas law, a Church, as a charitable institution, is immune from tort liability. To protect their reputation and to protect the congregants, Arkansas churches buy liability insurance and uninsured motorist (UM) and underinsured motorist (UIM) coverage. When there is a serious accident causing multiple serious injuries the church and its insurer will often dispute the availability of the limits for the injuries incurred. In Argonaut Great Central Insurance Company v. Jerry Casey, et al., No. 12-1221 (8th Cir. 11/13/2012) the Eighth Circuit Court of Appeal was called upon to resolve a dispute between a church and its insurer concerning whether the insured could aggregate two different coverages to increase the amount of limits available to pay the injured.

FACTS

A bus owned by the First Baptist Church of Bentonville (the “Church”) was involved in a single-vehicle accident caused by the driver’s negligence, resulting in two fatalities and scores of serious injuries. At the time of the accident, the Church was insured by two policies issued by Argonaut Great Central Insurance Company (“Argonaut”), a Commercial Auto Policy (the “Policy”) providing $1 million liability insurance and $1 million uninsured and UIM insurance – the subject of this appeal – and a Commercial Umbrella Policy providing an additional $1 million excess coverage for auto accidents.

THE LITIGATION

Recognizing that personal injury claims would greatly exceed the policies’ combined coverages, Argonaut commenced a diversity interpleader action, naming known claimants as defendants and seeking to deposit $2 million into the court’s registry, $1 million for the combined limits under the Policy, and $1 million for the Umbrella Policy’s limit. The claimants asserted counterclaims against Argonaut pursuant to an Arkansas sttute alleging that the Policy limits include an additional $1 million from the UIM coverages. The trial court granted summary judgment for the claimants, ordered Argonaut to pay $2 million under the Policy into the court’s registry (plus an additional $1 million under the Umbrella Policy), and directed entry of final judgment permitting immediate appeal of the issue.

Argonaut appealed, arguing the Policy unambiguously precludes aggregating its liability and UIM coverages.

THE INSURANCE

It is undisputed that Argonaut provided the Church both liability and UIM coverages – liability coverage because they are tort victims of the Church’s agent – and UIM coverage because they are insured parties injured by a negligent driver (again, the Church’s agent) whose insurance coverage was less than the sum of their claims. The trial court held that the Policy unambiguously allowed aggregate recovery of the limits of both coverages.

Argonaut argued that three provisions limit the claimants’ recovery to the higher of either the liability or the UIM coverage, that is, to $1 million.

ANALYSIS

The law regarding construction of an insurance contract is well settled. If the language of the policy is unambiguous, the court must give effect to the plain language of the policy without resorting to the rules of construction. On the other hand, if the language is ambiguous, the court will construe the policy liberally in favor of the insured and strictly against the insurer. Language is ambiguous if there is doubt or uncertainty as to its meaning and it is fairly susceptible to more than one reasonable interpretation.

The “Coverage” section of the UIM endorsement provides:

“A. Coverage
“1. We will pay all sums the ‘insured’ is legally entitled to recover as compensatory damages from the driver of an ‘underinsured motor vehicle’. . .
“2. With respect to damages resulting from an ‘accident’ with an ‘underinsured motor vehicle,’ we will pay under coverage only if a. or b. below applies:
“a. The limit of any applicable liability . . . policies have been exhausted by payment of judgments or settlements; or
“b. A tentative settlement has been made . . .
“However, this Paragraph b. does not apply if the ‘underinsured motor vehicle’ is insured by us for Liability Coverage.”

Two aspects of this provision are significant to the issues before the court. First, the first clause confirms what Argonaut has conceded in this case – the definition of “underinsured motor vehicle” includes a vehicle that has liability coverage provided in the same policy as the UIM endorsement. In other words, Argonaut provides UIM coverage, for example, to passengers in the auto of its own insured if the limits of liability coverage provided by Argonaut does not cover their claims. Second, Argonaut will pay under its UIM coverage only after the “limit of any applicable liability . . . policies have been exhausted.”

Argonaut’s UIM coverage is explicitly additional or sequential to any liability coverage that may apply, including its own. With the UIM coverage so clearly stated as an aggregate coverage, it would take a contrary limiting provision of the utmost clarity to render the liability and UIM coverages mutually exclusive.

The “Two or More Coverage Forms” provision appears in Section IV of the Business Auto Coverage Form:

“If this Coverage Form and any other Coverage Form or policy issued to you by us or any company affiliated with us apply to the same ‘accident’, the aggregate maximum Limit of Insurance under all the Coverage Forms or policies shall not exceed the highest applicable Limit of Insurance under any one Coverage Form or policy.”

The UIM endorsement provides:

“Regardless of the number of covered ‘autos’, ‘insureds’, premiums paid, claims made or vehicles involved in the ‘accident’, the most we will pay for all damages and resulting from any one ‘accident’ is the Limit of Insurance for Uninsured and Underinsured Motorists Coverage shown in the Declarations.

“No one will be entitled to receive duplicate payments for the same elements of ‘loss’ under this Coverage and any Liability Coverage Form or Medical Payments Coverage Endorsement attached to this Coverage Part.”

The dual-coverage issue in this case only arises if a claimant is both covered by the negligent driver’s liability insurance policy and is an “insured” for purposes of the same policy’s UIM endorsement. This case illustrates why organizations whose members or employees frequently travel in covered autos (particularly charities) need this type of aggregate commercial auto coverages so that they insure against the organization’s risk of liability and provide UIM protection for passengers who may be injured due to the negligence of the organization’s driver as well as negligent drivers of other vehicles.

ZALMA OPINION

This case is limited by local law which gives a church immunity from tort liability thereby limits the injured persons to the coverages purchased by the church. The insurer thought it had written the policy so that the UIM and the Auto liability coverages did not aggregate. The Eighth Circuit concluded that it failed in that effort because of the use of language in the policy.

If it wished to limit its coverage to just the auto liability plus the umbrella it only needed to add an endorsement that said:

“Regardless of any other language in this policy if coverage applies due only to the negligence of the named insured there is no coverage available under the UM/UIM coverage.”

Or, it could have added an endorsement to its UM/UIM policy to state:

“This insurance does not apply if the uninsured or underinsured motorist is the named insured or an employee, agent or servant of the named insured.”

Litigation and visits to trial courts and the courts of appeal can be avoided by careful draftsmanship in the creation of a policy of insurance and careful reading of the policy in effect at the time the loss occurs. Insurance coverage lawyers who are retained by insurers to advise it of its rights, duties, and obligations should always look at the dispute as if it were sitting as a court of appeal more interested in protecting the injured than the insurer. In so doing it will avoid a great deal of expense and reduce the initial earnings of counsel but would increase the goodwill of the insurer to the coverage lawyers.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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FAILURE TO READ POLICY NO EXCUSE

Wasteful Litigation 

Insurance is, and has always been a contract. In modern practice insurance policies are written in easy to read language that requires nothing more than a fourth grade education to understand. Regardless, the public still believes they are difficult to read and understand. Insurance agents and brokers are also obligated to read the policy as issued to determine that they have obtained for the insured the coverage ordered and promised. Because everyone failed to do their due diligence with regard to a policy unnecessary litigation followed.

Sometimes, as this case shows, an insured will claim that the failure to read the policy as issued binds the insurer to the wording of a sample form which was broader than the policy as issued; failure to provide a policy as ordered; and failure to explain the coverages available will lead an insurer to wrongfully deny a claim and lead to unnecessary litigation.

Because of a series of errors the Supreme Court of Appeals of West Virginia was asked to resolve the dispute between the insurer New Hampshire Insurance Company (“New Hampshire”) and RRK, Inc. (“RRK”). New Hampshire contended that the circuit court’s order wrongfully reforms the subject policy and that it is against public policy in New Hampshire Insurance Company v. RRK, Inc., D/B/A Showboat Marina, No. 11-1099 (W.Va. 11/09/2012).

FACTUAL BACKGROUND

At about the same time the property was purchased, RRK sought insurance coverage for the property from a local insurance agent, Insurance Systems, Inc. (“Insurance Systems”). Insurance Systems then solicited an application for insurance and dealt directly with an Ohio insurance agency, Norman Spencer Agency, Inc. (“Norman Spencer”). Norman Spencer, in turn, dealt directly with Maritime General Agency, Inc. (“Maritime”). Maritime performed the underwriting services for the issuing insurer, the petitioner in this case, New Hampshire.

RRK dealt solely with Insurance Systems. During negotiations regarding the coverage sought, RRK requested that Insurance Systems provide it with a copy of the coverage forms of the proposed policy. In response, on September 20, 2007, Insurance Systems sent via facsimile a seventeen page document (“17-page fax”) addressed to Rudy Lee which stated, “Per our phone conversation of this morning, attached you will find the coverage forms you requested.”

It was the understanding of RRK and Insurance Systems that any policy issued would cover the barge and its contents and the two docks. Subsequent to receiving and reviewing the 17-page fax, Rudy Lee completed the application to purchase insurance coverage from New Hampshire and provided payment. The policy was set to be effective from September 28, 2007, to September 28, 2008. Several weeks after purchasing insurance coverage, RRK received in the mail a copy of their insurance policy from Insurance Systems. As with almost every member of the general public, neither of the Lees read the mailed copy.

The content of the mailed policy differed from the 17-page fax. Notably, at the top of the first substantive page of the mailed policy, language was included in boldface and capital 12-point font excluding coverage of property damaged by “wear, tear, and/or gradual deterioration.”

In April of 2008, Insurance Systems realized that New Hampshire had failed to list the barge as covered property under the insurance policy. In an e-mail dated April 28, 2008, an Insurance Systems agent informed New Hampshire of the omission and requested that the barge and its contents be added to the policy. In September of 2008, Rudy Lee and an Insurance Systems agent met to discuss property insurance coverage. It was discussed and agreed upon at the meeting that the insurance coverage should include coverage of the barge and its contents. The agent assured Mr. Lee that he would ensure that the barge and contents were covered under the policy.

On February 23, 2009, after the policy was renewed, the barge sank into the Ohio River. RRK filed a claim with New Hampshire for the barge and its contents. On February 25, 2009, New Hampshire denied RRK’s claim. New Hampshire stated that it denied RRK’s claim because the barge and its contents were not listed in the policy as covered property. On April 3, 2009, Insurance Systems e-mailed New Hampshire confirming that Insurance Systems had represented to RRK that the barge and its contents would be covered property under the policy. After investigation, New Hampshire determined that the barge and contents should have been covered property but renewed its denial because the wear-and-tear exclusion applied.

The trial court granted RRK’s motion for partial summary judgment and found that the barge and its contents were covered under the policy because RRK had a reasonable expectation that they would be covered. It further found that New Hampshire failed to meet its strict burden of proof with regard to the exclusionary language so as to make the wear-and-tear exclusion legally operable.

ANALYSIS

The circuit court’s June 22, 2011, order which granted partial summary judgment in favor of RRK found that RRK “had a Reasonable Expectation of Insurance Coverage for the subject Barge and Contents.” The record demonstrated, without question, that RRK was repeatedly assured that the barge and its contents were covered property under the insurance contract.

However, whether the wear-and-tear exclusion contained in the mailed copies of the policy, but not in the 17-page-fax, is valid is a different situation. This case involves a discrepancy between materials provided to RRK prior to purchasing the policy and the policy that was actually issued. Finding that the doctrine of reasonable expectations applies to this case. The trial court found that the wear-and-tear exclusion was not placed in a way as to allow RRK to reasonably expect the existence of the exclusion. New Hampshire argued the wear-and-tear exclusion was conspicuous, thus making RRK’s reliance on the 17-page fax unreasonable. Exclusionary clauses must be conspicuous, plain, and clear, placing them in such a fashion as to make obvious their relationship to other policy terms, and must bring such provisions to the attention of the insured. The parties did not dispute that the exclusion at issue was conspicuous in the policy. RRK argues, however, that because the wear-and-tear exclusion was not placed in the 17-page fax, it was not placed in such a way as to bring the exclusion to RRK’s attention and ignores the fact that they did not read the policy where the would have seen the exclusion on the first page.

There is no question of fact regarding whether the renewal policy was mailed to and received by RRK. Therefore, the circuit court did not err in finding, as a matter of law, that the renewal policy was mailed to and received by RRK.

CONCLUSION

The appellate court affirmed, in part, the circuit court’s order finding that the barge and its contents were covered property under the insurance contract as a matter of law. It also affirmed the circuit court’s finding that the renewal policy was mailed to and received by RRK. However, it reversed the circuit court’s order with regard to its finding that the wear-and-tear exclusion is invalid, and remanded the case for proceedings consistent with the opinion.

ZALMA OPINION

This case is a comedy of errors. The insurer issued the wrong policy and denied a claim based on its error. When the error was pointed out the insurer accepted coverage and then denied the claim anyway because it concluded the sinking of the barge was caused by wear and tear. The insured was wise enough to seek a draft policy wording before agreeing to insure with New Hampshire yet, as wise as they were, when the policy was delivered they averred that they never read the policy when it was delivered and when it was renewed. Only the insurance agent noted the error and convinced New Hampshire that the barge and contents were covered property only to have the insured claim the exclusion did not exist because it wasn’t part of the form they were provided before the policy was issued.

Professionalism on the part of the insured, the insurer, the brokers and agents would have avoided this litigation had they not acted with sloth, ignorance or lack of diligence.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Zalma’s Insurance Fraud Letter — November 15, 2012

More Fraud

Continuing with the twenty second issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the September 1t, 2012 issue about California’s Special Investigation Unit (SIU) Regulations and possible limitations on the Department of Insurance’s (DOI) ability to assess fines for violations of Regulations that exceed the promise of the statute authorizing the issuance of the SIU Regulations; a report on the affirmation of a conviction for insurance fraud and dealing drugs in Ohio proving that insurance fraud is not a victimless crime; and reports on the funding of the fight against insurance fraud in Contra Costa County, California.

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

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

The last 10 of posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•    Additional Insured Owed Defense
•    Public Policy Trumps Policy Wording
•    Happy Veterans Day
•    A Trick or Device Becomes A Robbery
•    Artificially Lowering Payroll to Avoid Premium Fails
•    UIM Insurer May Mount Defense of Underinsured Motorist
•    City Hoist On Its Own Petard
•    Coverage for Disparagement Under CGL
•    Today Is Election Day — Vote
•    No Coverage for Damage by Chinese Drywall

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

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

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

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

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

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Additional Insured Owed Defense

Extrinsic Evidence Available to Prove Summary Judgment

Illinois is a four corners state where the duty to defend is usually established by the allegations of the complaint and the wording of the policy. However, after a declaratory judgment suit is filed parties are allowed to admit extrinsic evidence as part of a summary judgment motion as the parties would be allowed to admit such evidence at trial.

The Illinois Court of Appeal resolved an insurance coverage issue arising out of a personal injury suit where it was alleged that the complaint did not allege sufficient facts to bring coverage within the requirements of the additional insured endorsements attached to the policy. The trial court, in Pekin Insurance Company v. Equilon Enterprises LLC, D/B/A, 2012 IL App 111529 (Ill.App. Dist.1 11/09/2012), denied plaintiff Pekin Insurance Co.’s motion for summary judgment on the question of duty to defend and, instead, granted judgment as a matter of law to defendants Equilon Enterprises, d/b/a Shell Oil Products US, and Shell Oil Company (collectively Shell), as additional insureds under the policy.  Pekin argued that the trial court erred because it relied on evidence presented at the motion for summary judgment that was not alleged in the complaint of the injured plaintiff against the insured and the additional insured.

FACTS

Waldemar Zablocki filed suit for injuries he sustained while lighting a cigarette behind a gas station operated by Summit Shell (Summit), d/b/a Mary’s Station II, Inc. The complaint alleged that Shell and Summit were directly liable for Zablocki’s injuries after an explosion occurred while fuel was being delivered to the station. Shell tendered the Zablocki action to Pekin for defense.

In its motion for summary judgment, Pekin argued that an endorsement to the policy limited coverage to Shell for “negligence in the granting of a franchise” and a second endorsement limited coverage “to liability arising out of [Summit's] operations *** [or its] premises.” According to Pekin, the Zablocki action did not allege negligence in the granting of the franchise or vicarious liability against Shell, which foreclosed a finding that Pekin owed a duty to defend.

Zablocki’s complaint alleged the gasoline filling process released flammable gasoline vapors into the air. Immediately upon exiting the store, Zablocki walked into a public alley behind the station to smoke a cigarette. When he attempted to light the cigarette, the small flame ignited the vapors, causing an explosion that injured Zablocki. The alleged acts of negligence against each defendant were identical.

In its complaint for declaratory judgment Pekin claimed its insurance policy extended coverage to Shell for negligence in the granting of a franchise and to claims of vicarious liability. The Zablocki complaint did not allege that the Shell defendants were vicariously liable for Zablocki’s injuries; nor did the complaint allege any fault by Shell in granting a franchise to Summit.

On June 14, 2007, Summit procured the Pekin policy as the named insured with an effective date of July 1, 2007. In accordance with certain franchise agreements, Summit listed Shell as “additional insured” to the Pekin policy. The policy contained two endorsements dealing with Shell, the first is listed as “Additional Ins – Grantors of Fran,” with the premium listed for the coverage. The second is listed as “Additional Insured – Flat Charge,” which lists a separate premium for the coverage. The first endorsement provides, “The person or organization shown in the schedule [is an insured], but only with respect to their liability as grantor of a franchise to you.” The second endorsement amends the policy to reflect that Shell is “an insured but only with respect to liability arising out of your operations and premises owned by or rented by you.”

After hearing argument on Pekin’s motion for summary judgment in its declaratory action, with a written response by Shell, with certain franchise agreements between Summit and Shell attached, the circuit court denied summary judgment to Pekin. Instead the court granted judgment as a matter of law to Shell, holding that Pekin had a duty to defend.

ANALYSIS

To determine whether an insurer has a duty to defend an action against an insured, generally, Illinois courts compare the allegations of the underlying complaint to the relevant portions of the insurance policy. If the complaint alleges facts that fall within or potentially within the coverage of the policy, the insurer is obligated to defend its insured even if the allegations are groundless, false, or fraudulent.

Illinois courts construe an insurance policy by considering the policy as a whole, the risk undertaken, the subject matter and the purpose of the contract. If the words in the policy are unambiguous, a court must afford them their plain, ordinary, and popular meaning.  However, if the words in the policy are susceptible to more than one reasonable interpretation, they are ambiguous and will be construed in favor of the insured and against the insurer who drafted the policy.

The existence of these two endorsements for additional-insured coverage necessarily means that the “Grantors of Fran” endorsement does not provide the only coverage to Shell, as the additional insured. While the “Grantors of Fran” endorsement appears to limit coverage as Pekin claims to negligence arising from the awarding of a franchise, Pekin does not, and cannot, argue that either coverage exists for Shell under that endorsement or it does not exist at all. Plainly, Shell is also listed as additional insured under the second endorsement. Since the second endorsement provides coverage to Shell as additional insured, the “grantor of franchise” endorsement does not limit coverage under the Pekin policy to Shell in its capacity as franchisor to Summit. As a consequence, this case does not call upon the Court of Appeal to address the scope of the coverage provided under the “grantor of franchise” endorsement.

A trial court should not ignore the agreements that serve to drive the named insured to purchase the liability policy naming the other party as an additional insured, in assessing the risk undertaken and the subject matter and purpose of the insurance contract. The trial court need not wear judicial blinders and may look beyond the complaint at other evidence appropriate to a motion for summary judgment. The four corners rule does not apply in a motion for summary judgment and that to require the trial court to look solely to the complaint in the underlying action to determine coverage would make the declaratory proceeding little more than a useless exercise.

The franchise agreements, as the driving force behind Summit’s procurement of the Pekin policy, reinforce the decision that Pekin had a duty to defend Shell. Resolution of the duty to defend issue should not turn on the absence of allegations of vicarious liability when the allegations in the complaint do not preclude the possibility that the additional insured could be found liable solely as a result of the acts or omissions of the named insured.

The Court of Appeal rejected Pekin’s implicit contention that in the context of this case, only if the allegations of the underlying complaint support a claim of vicarious liability can it find a duty to defend owed by Pekin. The burden was on Pekin to demonstrate that the allegations in the underlying complaint do not potentially fall within the coverage of the policy. It failed to carry the burden.

In a concurring opinion on justice noted that control is the key element of vicarious liability. The complaint alleged that Shell had “control.” Since “control” is the key element of vicarious liability, the factual allegations of the complaint (without the extrinsic evidence produced at summary judgment) triggered Pekin’s duty to defend, even though the complaint does not allege vicarious liability.

ZALMA OPINION

This is one of thousands of appellate decisions that establish that the duty to defend is broader than the duty to indemnify. More importantly it is evidence that insurance companies fail to read the policies they issue before they issue them to make them clear and unambiguous. Additional insured endorsements are fairly simple documents and can easily be made clear. However, when an insurer, as did Pekin, includes two additional insured endorsements in a single policy, create an unnecessary ambiguity.

Although the four corners rule of policy interpretation calls for strict review of the wording of the complaint and the policy insurers should never conclude that a court will agree with its interpretation of the underlying complaint. In this case, at least one justice, found allegations of vicarious liability bringing the case into the four corners rule even though he agreed with the other justices that the extrinsic evidence presented at summary judgment were sufficient to find 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Public Policy Trumps Policy Wording

Voluntary Payment Clause Does Not Apply to Lawyer’s Admission of Error

Lawyers who make an error that can cause damage to a client are obligated, by ethical canons, to advise the client and others who may have been damaged by the error of the lawyer. Liability insurance policies, including lawyers’ errors and omission policies, require that the lawyer get the permission of the insurer before making an admission of liability. Because the two requirements are contradictory, the Illinois Court of Appeal was called upon to resolve a case of first impression whether an admission of error in a legal malpractice claim by a policyholder without his insurance company’s approval gave the company the right to deny coverage and not defend the attorney and his law firm, in Illinois State Bar Association Mutual Insurance Company v. Frank M. Greenfield and Associates, P.C., An Illinois Professional Corporation, 2012 IL App 110337 (Ill.App. Dist.1 11/09/2012).

Attorney Frank M. Greenfield admitted to making a mistake in drafting a client’s will that affected the distribution of funds from a trust established by his client. According to the letter, which was sent to all of the trust’s beneficiaries, Greenfield’s mistake resulted in several of the beneficiaries receiving less money than they otherwise would have received had the client’s wishes been properly implemented. Those beneficiaries, defendants Orrin Adler, Barbara Adler, Michael Hanna, and Faye R. Adler Grafton (collectively, the underlying plaintiffs), filed suit against Greenfield and his firm, Frank M. Greenfield & Associates, P.C. (collectively, Greenfield), for legal malpractice.

Greenfield had a professional liability insurance policy through Illinois State Bar Association Mutual Insurance Company (ISBA Mutual), but did not inform ISBA Mutual prior to sending the letter to the beneficiaries. ISBA Mutual claims that, by failing to inform it of the letter prior to sending it, Greenfield violated a provision of his insurance policy and, consequently, ISBA Mutual had no duty to defend Greenfield in the subsequent legal malpractice action. ISBA Mutual filed an action for declaratory judgment, seeking an order that it had no duty to defend Greenfield. The prayer for relief in the declaratory action does not mention coverage; it only requested the trial court to find that it had no duty to defend as a result of Greenfield’s admission letter to the beneficiaries of the trust. Both parties filed motions for summary judgment, and the trial court granted Greenfield’s, finding that ISBA Mutual had a duty to defend since Greenfield did not admit to liability in the letter and consequently did not violate his insurance policy; the trial court also found that even if he had violated the policy, ISBA Mutual was not prejudiced by the breach.

BACKGROUND

The facts are largely undisputed. On March 24, 2010, ISBA Mutual filed a complaint for declaratory judgment, alleging that the law firm of Frank M. Greenfield & Associates, P.C., was the named insured on a professional liability insurance policy issued by ISBA Mutual, and Greenfield individually was an insured on that policy. The firm and Greenfield were named in a lawsuit initiated by the underlying plaintiffs, who sought compensatory damages for Greenfield’s omission of a provision in a client’s will, which allegedly damaged the underlying plaintiffs upon the client’s death. The firm and Greenfield tendered their defense of the suit and ISBA Mutual accepted that tender, subject to a reservation of rights for the reasons underlying its complaint for declaratory judgment.

ISBA Mutual alleges that its insurance policy contains a provision entitled “Voluntary Payments,” which provides: “The INSURED, except at its own cost, will not admit any liability, assume any obligation, incur any expense, make any payment, or settle any CLAIM, without the COMPANY’S prior written consent.” (emphasis added)

ISBA Mutual argued that it had no duty to defend the firm and Greenfield in connection with the underlying plaintiffs’ complaint because Greenfield admitted liability in a letter dated June 17, 2008, and seeks a judgment finding the same.

Attached to the complaint was the plaintiffs’ complaint in the underlying action. The complaint alleges that Greenfield represented Leonard and Muriel Perry for purposes of estate planning. Leonard executed a will that poured his assets into a trust known as the “Leonard W. Perry Declaration of Trust”; Muriel did the same, with her assets pouring into the “Muriel W. Perry Trust Agreement.” From time to time, Leonard and Muriel amended their trusts, and in 1996, Leonard executed an amendment giving Muriel the power of appointment to make changes and modifications to the plan of distribution of the funds in his trust upon Leonard’s death. After Leonard’s death, in 2007, Greenfield amended Muriel’s will to include language “that directed, pursuant to her Power of Appointment of the Leonard W. Perry Trust dated March 22, 1996, that assets in the Leonard W. Perry Trust dated March 22, 1996 were to be distributed according to the terms of the Muriel Perry Trust.”

In 2008, Muriel again amended her will, making changes to certain bequests of the funds in her trust. However, in preparing the will, Greenfield “failed to include language that Muriel W. Perry was exercising her Power of Appointment from her deceased husband’s trust.” This error remained undiscovered until after Muriel’s death. Approximately a month after Muriel’s death, Greenfield disclosed his omission of the power of appointment in the 2008 will to the beneficiaries of the trust. The underlying plaintiffs claimed that Greenfield was negligent in failing to include the power of appointment provision and that as a result of that omission, they “have been deprived of monies for which they were the intended beneficiaries.”

The complaint in the underlying action included as an exhibit the June 17, 2008, letter that ISBA Mutual claims relieved it of its duty to defend Greenfield and the firm. Since the language of the letter is central to the issue in the instant appeal, we relate the letter in its entirety. The letter provided:

“You are receiving this letter because you are named in the Muriel Perry Trust as a beneficiary. The purpose of this letter is to give you the facts regarding the value of Trust assets and the respective amounts of the distributions….” It went on to explain how the error could affect the amounts recovered by individual beneficiaries of the will.

On September 8, 2010, Greenfield filed a motion for summary judgment, arguing that he had an ethical duty to inform the beneficiaries of his mistake, that he did not admit liability but only informed the beneficiaries of what occurred, and that the letter did not prejudice ISBA Mutual because JP Morgan Chase Bank, the trustee, would have immediately informed the beneficiaries of the same matters if Greenfield had not done so.

On December 7, 2010, the trial court issued a written opinion in which it found that Greenfield’s letter only admitted facts and did not admit liability. Finally, the court found that even if Greenfield had admitted liability, ISBA Mutual had not demonstrated that it was prejudiced by Greenfield’s conduct, finding that “[a]ny claim of prejudice is speculative, at best.” Accordingly, the trial court granted Greenfield’s motion for summary judgment and denied ISBA Mutual’s cross-motion for summary judgment.

ANALYSIS

The first question the court considered was whether the voluntary payments provision in ISBA Mutual’s insurance policy was enforceable. If it is not enforceable, then the question of whether Greenfield admitted liability or merely admitted the facts concerning his mistake is immaterial. Both parties acknowledge that, as an attorney, Greenfield had a duty to disclose his mistake to the beneficiaries.

There is very little case law concerning the effect of a “voluntary payments” clause such as that at issue.  The Court of Appeal recognized that an admission of fault did not amount to an assumption of liability, since it amounted only to an admission of the truth of the fact from which liability might flow, while an assumption of liability brought into existence a contractual obligation.

The Court of Appeal concluded, after reviewing case law from other jurisdictions, that a provision such as the one at issue here is against public policy, since it may operate to limit an attorney’s disclosure to his clients.

ZALMA OPINION

The reason this is a case of first impression is because the lawyer did not admit liability he only admitted error. The insurer attempted a strict interpretation of the voluntary payments clause and, in so doing, made it worthless since it has now been found to be in violation of public policy by improperly limiting an attorney’s obligation to disclose both good and bad information to his or her clients.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Happy Veterans Day

May we all remember those of the Veteran’s who served their country, whether in combat or support roles.

 

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A Trick or Device Becomes A Robbery

Clear Definition Essential

Crime insurance policies have, since they were first offered to insureds, had no problem insuring against theft and robbery. They did have a problem with con games where an insured – because he is tricked – hands over his property to a criminal. In Vam Check Cashing Corp v. Federal Insurance Company, No. 11-2644-cv (2d Cir. 11/07/2012), the Second Circuit Court of Appeal was asked to resolve a dispute between an insured and an insurer that a criminal scheme perpetrated at its store constituted “robbery” within the meaning of its crime insurance policy which the defendant insurer issued.

The common definition of the term “robbery” is the taking of money or goods in the possession of another, from his or her person or immediate presence, by force or intimidation. Insurance companies allow lawyers to help them write insurance policies. Definitions are, as a result, taken from the common meaning and made more complex. As a result insurance coverages that are usually clear and unambiguous become complex enough to allow a court to apply the contra preferendum rule that if there is an ambiguity it will be resolved in the favor of the insured.

BACKGROUND

Plaintiff-appellee VAM Check Cashing Corp. (“VAM” or “the insured”) operates a number of check cashing stores in the New York City area, including Pine Check Cashing in Brooklyn, New York. VAM purchased a crime insurance policy (“Policy”) from defendant-appellant Federal Insurance Company (“Federal” or “the insurer”). During the pendency of the Policy, a group of criminals successfully tricked a Pine Check Cashing employee, Romanita Vazquez, into turning over $120,000 in cash to them. The parties do not dispute the facts of the scheme, which are detailed principally in Vazquez’s three-page statement prepared after the crime.

Some time before noon on September 2, 2009, Vazquez received a phone call from a woman claiming to be the wife of VAM’s owner. Over the course of a wide-ranging chat, the caller told Vazquez that her husband was opening three new check cashing stores, including one in Manhattan that very day. During this call, Vazquez received a second call from another woman who identified herself as the manager of the newly opened Manhattan store. The second caller said that a government official had arrived at the new store to collect a tax bill, but because the store had just opened, it had insufficient cash on hand to pay the bill. Vazquez relayed this information to the original caller, who told Vazquez that a man named Windfrey would come to Pine to collect the $100,000, and that she would be able to identify him by his use of a code number. Later, the original caller increased the amount to $120,000, and Vazquez placed that amount in a box.

Eventually, a man who identified himself as Windfrey came into the store. He offered the pre-arranged code number, and Vazquez buzzed him into the back of the store. She then handed him a box containing the $120,000 in cash, and he left. As noted by the district court, Vazquez testified at her deposition that she “never felt threatened by Mr. Windfrey,” and at the time, “she did not believe he was dangerous or a thief.”

Over the course of the afternoon, Vazquez did not hear anything further from the owner. She gradually grew suspicious and eventually called the police that evening. The police never caught the perpetrators or recovered the money; they advised VAM that the scheme was the work of a sophisticated group of criminals that had perpetrated similar scams across the country.

After the loss, VAM made a claim under the Policy, asserting that the crime was covered under the Policy’s definition of “robbery.” In January 2010, however, Federal gave final notice that it denied the claim. VAM then sued in the United States District Court for the Eastern District of New York (Jack B. Weinstein, District Judge) for breach of contract, claiming damages of $112,500 (the $120,000 loss less the Policy’s $7500 deductible). The facts being essentially undisputed, the parties filed cross motions for summary judgment. On May 25, 2011, the district court granted summary judgment to VAM.

The district court ruled that the policy’s definition of “robbery” is ambiguous, that the insured offered a reasonable interpretation of the policy permitting coverage, and that the insurer was therefore liable for the loss.

DISCUSSION

The parties do not dispute the material facts underlying the claim. The case thus turns on the interpretation of the insurance contract. Under New York insurance law, the plain language of an insurance policy, read in light of common speech and the reasonable expectations of a businessperson.

The basis for VAM’s claim under the Policy, and thus for its breach of contract action for failure to pay that claim, is that the events of September 2, 2009 fell within the Policy’s “Robbery” clause. The Policy states in relevant part that “[Federal] shall be liable for direct losses: . . . Within the Premises of Money and other property received from sources other than the sale of Food Stamps but only when such loss is caused by: . . . (2) Robbery or attempt thereat.” The Policy defines the term:

“‘Robbery’ means the unlawful taking of insured property from an Insured, a partner, an Employee or any other person authorized by the Insured to have custody of the property by violence, threat of violence or other overt felonious act committed in the presence and cognizance of such person, except any person acting as a watchman, porter or janitor.”

The parties agree that Vazquez was an “Employee” and was not “acting as a watchman, porter or janitor.” The parties also agree that “Windfrey” and his associates employed neither actual nor threatened violence. Thus the definition can be simplified for this case:

“‘Robbery’ means the unlawful taking of insured property from . . . an Employee . . . by . . . overt felonious act committed in the presence and cognizance of such person …” This is clearly a different definition than the common dictionary definition recited above.

VAM’s reading is grammatically natural, since it does not require an adjectival word to be read adverbially. VAM’s reading thus has the advantage of respecting the plain (if strict) meaning of the contested phrase. Nor would VAM’s proposed meaning render the word “overt” meaningless. In many forms of theft, the act of taking is itself covert; if, for example, Windfrey had grabbed a pile of cash and snuck it into his pocket while Vazquez’s back was turned, his act itself (not simply the true nature of the act) would presumably be considered covert.

Thus, the meaning of the phrase “overt felonious act” is ambiguous standing alone. We therefore examine whether it can be clarified by the second contested phrase, “committed in the presence and cognizance of such person,” or by the remaining textual context.

THE EFFECT OF AMBIGUITY

With Federal’s textual arguments exhausted, the ambiguity remains. New York follows the maxim of contra proferentem in insurance cases: where the plain language of a policy permits more than one reasonable reading, a court must adopt the reading upholding coverage. Because the plain text of the Policy does not resolve this case, VAM must prevail if it has provided us a reasonable reading permitting recovery.

The Second Circuit concluded that VAM has. Under VAM’s overall reading of the Policy provision at issue, the insured will recover for “robbery” whenever property is taken from an employee by means of an observable act that amounts to a felony, provided that the act occurs in the presence of the employee and the employee is aware of the act’s occurrence. But the employee need not be aware that the act itself is felonious. This interpretation is at least as plausible a reading of the language as that provided by Federal.

No contemporaneous awareness of the act’s criminal nature was required.

Finally, it is clear that the theft fell within VAM’s proposed reading of the Policy. Since the act must effect an “unlawful taking of insured property,” the Second Circuit agreed with VAM that the most relevant act was the obvious, readily observable action of Windfrey in taking the box of cash. That act was clearly “felonious,” was “overt” in the sense of being observable, and was both within Vazquez’s physical “presence” and her “cognizance,” since she was aware of his request for the money and her act of giving it to him.

ZALMA OPINION

Federal Insurance Company failed, in this case, to follow the KISS doctrine to Keep It Simple Stupid. By attempting to make the definition of “robbery” more precise it created an ambiguity and allowed an insured to recover for a “robbery” that was really a bunco scheme or a trick and device.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Artificially Lowering Payroll to Avoid Premium Fails

Are Per Diem Payments Payroll?

No one likes to pay insurance premiums. Businesses and individuals continue to try methods to avoid paying high premiums if there is a facially honorable way to reduce premium costs just as they use similar methods to pay as little tax as facially within the law. In Readylink Healthcare, Inc v. Dave Jones, As Insurance Commissioner, Etc, No. B234509 (Cal.App. Dist.2 11/06/2012), the California Court of Appeal was asked to resolve a dispute over a year-end audit by respondent State Compensation Insurance Fund (SCIF) of appellant ReadyLink HealthCare, Inc.’s (ReadyLink) payroll to determine its 2005 premium for its workers’ compensation insurance policy.

The SCIF assessed an additional premium of $555,327.53 based on its determination that ReadyLink’s per diem payments to traveling nurses counted as payroll. The Insurance Commissioner upheld the assessment, finding that ReadyLink’s per diem payments were not “reasonable” and therefore not exempt from payroll because they could not be substantiated and were designed to camouflage the assignment of income.

On appeal, ReadyLink contended: (1) the trial court incorrectly applied the substantial evidence standard of review rather than its independent judgment; (2) the Commissioner’s decision is preempted by federal tax law; (3) the Commissioner’s decision improperly created a new regulation without public hearing, comment and notice; and (4) equity dictates that the Commissioner’s decision should not apply retroactively.

FACTUAL BACKGROUND

ReadyLink is a private healthcare staffing agency that provides temporary traveling nursing personnel to hospitals and other acute care centers throughout California and other states. Nurses register with ReadyLink, which verifies the nurses’ credentials, notifies them when shifts are available and pays their wages. The SCIF is a quasi-public company created by the Legislature to ensure that mandatory workers’ compensation insurance will be available to California employers.

In September 2000, the SCIF issued a workers’ compensation insurance policy to ReadyLink. The policy was renewed annually until ReadyLink cancelled it in March 2007. At the end of each policy year the SCIF reviewed ReadyLink’s payroll records to determine the amount of wages paid that year to ReadyLink’s employees, because premium rates are largely based on the employer’s payroll.

The SCIF conducted its final audit of ReadyLink in 2007 for the policy period of September 2005 through September 2006. While reviewing ReadyLink’s payroll registers, the SCIF’s senior auditor in the special risk division discovered that ReadyLink was paying nurses a minimum wage of approximately $6.75 per hour plus a much higher stipulated per diem amount. The auditor had conducted dozens of audits of nurse staffing agencies and registries during her employment with the SCIF and had never seen such an agency pay more than 50 percent of wages in the form of per diem payments or pay hourly wages that were significantly below the average hourly rate typically paid to trained, licensed, registered nurses in California.

She questioned ReadyLink about its per diem payments and requested documentation to substantiate these payments. ReadyLink responded that it had been audited by the Internal Revenue Service (IRS) in 2008 for the premium year in question and the IRS found that ReadyLink was in compliance with the federal per diem tax rules. ReadyLink did not provide any additional documents to the SCIF. Based on the lack of supporting documentation, the SCIF determined that the per diem amounts should be included as payroll. This increased payroll had the effect of increasing ReadyLink’s workers’ compensation insurance premium by $555,327.53, for a total annual premium of $800,106.00.

THE ISSUE

The Commissioner’s Decision phrased the issue presented as follows: “For policy year 2005, did SCIF properly include per diem payments made to registry nurses as ‘payroll’ or ‘remuneration’…?” The Commissioner noted this was “a matter of first impression.” Subsistence Payments are considered to be reimbursement for additional living expense by virtue of job location.  Stipulated per diem amounts are not considered payroll if the “amount is reasonable and the employer’s records show that the employee worked at a job location that would have required the employee to incur additional expenses not normally assumed by the employee.”

After a lengthy analysis, including review of federal tax law, the Commissioner determined that a per diem payment is reasonable if it comports with common sense, is not lavish or extravagant, and is not made for the purpose of circumventing per diem regulations. The Commissioner also determined that an employer must provide records proving that each employee receiving per diem reimbursement worked at a location that required the employee to incur additional duplicate living expenses and that such expenses were mitigated by per diem reimbursement.

The Commissioner concluded that ReadyLink failed to prove that its per diem payments were reasonable because it paid “a below-market hourly wage for the type of work being performed” and then used the per diem payments to increase its nurses’ income while avoiding payroll tax liabilities for itself. The Commissioner expressly rejected ReadyLink’s contention that its per diem payments were reasonable because they comported with the federal per diem amounts for the Continental United States listed in 41 Code of Federal Regulations, Chapter 301, Appendix A (CONUS). The Commissioner found that ReadyLink failed to prove the per diem payments reflected the traveling nurses’ anticipated living expenses, failed to show that its nurses worked at locations that required additional duplicate living expenses beyond normal commuting expenses, failed to monitor employee eligibility for per diem payments, and failed to require its employees to substantiate their per diem expenses.

After ReadyLink filed a notice of appeal in the Court of Appeal it filed a class action lawsuit in federal district court against the SCIF and the Commissioner seeking a declaratory judgment that the Commissioner’s Decision is preempted by federal law. The SCIF and the Commissioner filed motions to dismiss the federal complaint. The day after ReadyLink filed its opening brief in this Court, the federal district court issued an order granting the motions to dismiss.

DISCUSSION

A trial court’s review of an adjudicatory administrative decision is subject to two possible standards of review depending upon the nature of the right involved.

  1. If the administrative decision substantially affects a fundamental vested right, the trial court must exercise its independent judgment on the evidence.  The trial court must not only examine the administrative record for errors of law, but must also conduct an independent review of the entire record to determine whether the weight of the evidence supports the administrative findings.
  2. The administrative decision neither involves nor substantially affects a fundamental vested right, the trial court’s review is limited to determining whether the administrative findings are supported by substantial evidence.

The Commissioner’s Decision does not frustrate federal law or create an obstacle for employers to comply with both federal and state regulations on the treatment of per diem allowances. The Commissioner’s Decision merely determined that under his subsistence payments rule, a per diem payment is reasonable “if it comports with common sense, is not lavish or extravagant, and is not made for the purpose of circumventing per diem regulations.” Furthermore, an employer must provide records proving that each employee receiving a per diem reimbursement worked at a location that required the employee to incur additional duplicate living expenses and that such expenses were mitigated by per diem reimbursement.

ReadyLink presented no evidence that compliance with regulations is an ‘administrative burden. Employers routinely compile information for regulatory purposes and already comply with incongruent tax rules and regulations. Given the various laws governing employer recordkeeping and given that the USRP rules do not require any novel recordkeeping.

The Court of Appeal concluded that ReadyLink’s federal preemption argument is nothing more than a red herring and a distraction from the real issue of whether the Commissioner exceeded his authority in determining that ReadyLink’s per diem payments constitute payroll for workers’ compensation premium purposes and the Commissioner’s Decision is not preempted by federal law.

The Court of Appeal agreed with the Commissioner that the employer must provide records proving that each employee receiving per diem reimbursement worked at a location that required the employee to incur additional living expenses. The USRP also mandates that an employer’s records must demonstrate the employee incurred additional duplicate living expenses and that such expenses were mitigated by per diem reimbursement. ReadyLink cannot claim any confusion or surprise with respect to the record-keeping obligation given that the SCIF repeatedly asked ReadyLink for documentation verifying its per diem payments both during and after the audit.

ZALMA OPINION

ReadyLink, by paying its nurses on an inflated per diem basis rather than salary reduced its Workers’ Compensation premium obligation by almost two thirds. It was caught only in the last year of its policy and assessed an additional premium to more accurately represent the risk that it asked the insurer to take. It was lucky that the only dispute is over the amount of premium. If the scheme to reduce premium was found to be intentional ReadyLink could have faced criminal charges for premium fraud.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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UIM Insurer May Mount Defense of Underinsured Motorist

Bankruptcy Does Not Allow Defendant To Admit Liability

The Supreme Court of Virginia was asked to determine whether entry of summary judgment against a defendant motorist also binds the underinsured motorist (UIM) insurer of Sheila Womack and whether the UIM insurance carrier retains its own right to defend in the event that the interests of the UIM insurance carrier and the defendant or her liability insurer diverge. In Transportation Insurance Company v. Sheila Womack, No. 112283 (Va. 11/01/2012) the court was faced with a serious injury case where the defendant filed Chapter 7 Bankruptcy, had the debt to the injured person discharged, and by so doing was found to have admitted liability.

Facts

Sheila Womack filed suit against Jerrene V. Yeoman to recover four million dollars for injuries sustained from a car accident allegedly caused by the negligent driving of Yeoman. A copy of the complaint was served on Transportation Insurance Company (Transportation), Womack’s UIM carrier required by Virginia statutes to take advantage of the policy’s UIM provisions.

Both Yeoman, represented by her liability insurance carrier, Government Employees Insurance Company (GEICO), and Transportation filed answers to the complaint in their own names. Yeoman denied all allegations of negligence and asserted an intent to plead affirmative defenses, including a claim of contributory negligence. Transportation similarly denied all allegations of negligence, reserved the “right to defend this case in its own name or in the name of the Defendant as permitted by statute,” and pled all affirmative defenses that would be supported by evidence.  Transportation asked that Yeoman’s “liability insurance carrier . . . plead and prove the[] affirmative defenses.”

Following the filing of Yeoman’s and Transportation’s answers, Yeoman proceeded to file all motions for the defense and answer all motions filed by Womack. Transportation remained silent. In the midst of the developing litigation, Yeoman filed a voluntary petition under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia. As a result, the tort proceedings were stayed until the conclusion of the bankruptcy action.

In Yeoman’s bankruptcy petition, fifteen million dollars of debt surrounding the tort litigation was listed with no indication in the provided columns of the schedules of debt that the claim was either disputed or contingent. The schedules listed claims of five million dollars each owed to Womack, GEICO, and Transportation. Based on these signed statements, discharge under Chapter 7 of the Bankruptcy Code was granted. The stay was subsequently lifted with instructions that Womack not enforce the recovery or judgment against Yeoman, her property, or property of the estate.

Based on Yeoman’s designation of the debt arising from the tort action in her Chapter 7 bankruptcy proceedings as uncontested, and the subsequent discharge in bankruptcy, Womack made a motion for summary judgment. The motion was heard in the Circuit Court of the City of Richmond, where counsel for Womack, Yeoman, and Transportation were all present.

During oral argument, Transportation objected to the suggestion that the UIM carrier should also be bound by the bankruptcy proceeding, contending that it had no knowledge of the details of, and was not a party to, the Chapter 7 bankruptcy proceeding.

The circuit court granted Womack’s motion for summary judgment on the ground that a continued denial of liability by Yeoman would constitute impermissible approbating (accepting part of an action and rejecting those parts unfavorable to one’s interest) and reprobating. Transportation filed a motion to reconsider, asking that it be able to defend its interests as the UIM carrier. The court denied the motion, explaining that Transportation had relinquished its rights to put forth a defense by filing an answer that relied on the defendant’s liability insurance carrier to assert its affirmative defenses, and that “defendant and her liability insurance carrier admitted liability.” Transportation appealed.

Analysis

Virgina statutes provide that when an insured plaintiff brings suit against a uninsured motorist (UM) or a UIM and intends to make a claim for recovery from the insurer, the UM or UIM insurance carrier will “have the right to file pleadings and take other action allowable by law in the name of the owner or operator of the uninsured or underinsured motor vehicle or in its own name.” It is therefore undisputed that a UIM insurance carrier has a statutory right to defend its interests in a tort action between the insured plaintiff and the underinsured defendant.

It is also undisputed that the UIM insurance carrier’s right to defend is not tied to the actions of the underinsured defendant, but rather each is entitled to control his or its own action but not the actions of the other.

After filing its answer, Transportation did not participate again in its own name until filing a response to the motion for summary judgment, when it once more adopted the defense asserted by Yeoman. Womack contends that Transportation, based on its consistent reliance on Yeoman and her liability insurer, fully exercised its rights by turning the defense over to Yeoman in its entirety.

Transportation denies handing its right to defend over to Yeoman. Transportation describes the “call” for Yeoman to prove these defenses as a demand that Yeoman act on the affirmative defenses rather than a relinquishment of all responsibility for the defense. A liability insurance carrier has a non-delegable duty to defend the insured, and that by asking the liability insurer to assert affirmative defenses Transportation was merely asking the liability insurer to fulfill its statutory requirement to defend.

The Supreme Court reviewed Transportation’s answer in its entirety and found that it was clear that Transportation retained its right to defend should Yeoman or her liability insurance carrier later abandon their own defense of the case. This is evidenced by Transportation’s decision to file an answer in its own name, reserving the right to defend the case in its own name or in the name of the Defendant as permitted by statute. Transportation went on to deny allegations included in Womack’s complaint and assert specific affirmative defenses that it demanded the liability insurer assert in the course of litigation.
In relying upon Yeoman’s liability insurance carrier to defend the case, Transportation did not relinquish its right to conduct its own defense if the interests of the parties diverged. As long as it was in the interest of Yeoman, her liability insurance carrier and Transportation to actively defend against Womack’s claim as to liability and damages, there was no reason for Transportation to mount a separate defense. Only when the interests of the parties diverged, as when Yeoman found it in her interest to file for bankruptcy, was it in Transportation’s interest to mount a separate defense.

Because the Supreme Court reversed the summary judgment as to Transportation it concluded that it must necessarily reverse the summary judgment entered against Yeoman. The best means of resolving the conflict between the defendant’s right to control her case, including the right to admit liability, and the UIM carrier’s right to defend its interests to the ingenuity of the trial courts, which will best be able to fashion workable solutions to problem cases.

Conclusion

The case was remanded to the trial court to allow Transportation to present a defense, as permitted by Virginia statutes.

ZALMA OPINION

Virginia is unique since it allows a UIM insurer to participate in the suit brought by its insured against the underinsured motorist to avoid the underinsured motorist from imposing liability on the UIM insurer by admitting liability. Since the underinsured motorist had, after filing bankruptcy, no personal liability it would be unfair to bind the UIM insurer without allowing it to mount the defense the policy and local statutes allow.

Unlike a liability policy an UIM policy promises that in the event the insured is injured by an underinsured motorist the UIM insurer will act as if it is the insurer of the uninsured motorist and has the right to raise any of the defenses made available to the underinsured motorist as if he or she had no insurance at all. To deprive the UIM insurer of the right to defend would rewrite the wording of the policy and deprive the insurer of the rights provided by state statutes.

The Supreme Court of Virginia concluded, with good cause, that it would have been unfair to make the UIM insurer liable, by the admission, solely because of the bankruptcy, of the tortfeasor.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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City Hoist On Its Own Petard

Think Before Making Offer About Insurance

California is a state with strong government employee unions. In International Brotherhood, Etc v. City of Redding, No. C067709 (Cal.App. Dist.3 11/02/2012) the International Brotherhood of Electrical Workers (“IBEW”) sued the City of Redding to compel it to pay 50% of the cost of medical insurance for retirees. The state of California, California Counties and California cities have been quite generous in the contracts entered into with unions and union employees of the state and local entities. The City of Redding promised to pay 50 percent of employees’ medical insurance premiums after retirement and then attempted to renege on the promise.

FACTS

Local 1245 of the IBEW filed a petition for writ of mandate to compel the City of Redding to rescind its unilateral retraction of its promise. The City demurred, and the superior court sustained the demurrer without leave to amend and dismissed IBEW’s petition, deciding that (1) the right of active employees to receive future medical insurance benefits cannot be vested because it is subject to the collective bargaining process and (2) the memorandum of understanding (MOU) between the parties cannot be deemed to provide vested rights because the MOU remains in force only until its expiration.

After IBEW appealed the superior court’s dismissal of its petition, the California Supreme Court filed its opinion in Retired Employees Assn. of Orange County, Inc. v. County of Orange (2011) 52 Cal.4th 1171 (Retired Employees). In that case, the Supreme Court held that “under California law, a vested right to health benefits for retired county employees can be implied under certain circumstances from a county ordinance or resolution.”

BACKGROUND

IBEW alleged that since 1979, in its memorandum of understanding with the IBEW and in other communications with Local 1245 and City employees, the City promised to all Electric Department employees represented by Local 1245 that the City would pay 50% of the group medical insurance premium for retirees and their dependents. This obligation, communicated repeatedly by the City, was used as an inducement to recruit and retain employees as well as to convince them to accept lower wages in return for the benefit.

In March 2010, the City unilaterally cut the retiree health benefit to provide a subsidy of only 2% per year of service, up to a maximum of 50%. By cutting the City’s contribution to employees’ retiree health benefits IBEW alleged that the City violated its promise to maintain the benefit unless the parties mutually agreed otherwise. The MOUs also provided that they “will remain in full force and effect, unless modified by mutual agreement.” And the promises made in the MOUs were approved by the city council.

City employees with at least five years of service may retire after age 55. The City also made promises to employees, independent of the MOUs, to pay 50 percent of future retiree medical insurance premiums, through job postings, as well as internal documents and communications.  In 2008, the City and IBEW started negotiations for a new collective bargaining agreement. The parties initially agreed that the City’s payment of 50 percent of future retirees’ medical insurance premiums was a vested benefit. In 2010, however, the City changed its position and proposed to pay two percent per year of service, up to 50 percent, of retirees’ medical insurance premiums. Since the parties were unable to reach an agreement, the City unilaterally imposed its new proposal.

DISCUSSION

The Supreme Court decided Retired Employees in response to a certified question from the Ninth Circuit of the United States Court of Appeals. The Supreme Court responded that “a county may be bound by an implied contract under California law if there is no legislative prohibition against such arrangements, such as a statute or ordinance.”

Legislation in California may be said to create contractual rights when the statutory language or circumstances accompanying its passage clearly evince a legislative intent to create private rights of a contractual nature enforceable against the governmental body. Although the intent to make a contract must be clear, California case law does not require that the intent be express. A contractual right can be implied from legislation in appropriate circumstances. Where, for example, the legislation is itself the ratification or approval of a contract, the intent to make a contract is clearly shown.

Applying Retired Employees, the appellate court concluded that the trial court’s reasons for sustaining the demurrer are not valid. It concluded that there was a sufficiently clear showing, for pleading purposes, that legislation – that is, the ratification of the MOUs by the city council – was intended to create an obligation that survived the expiration of the MOUs.

The MOUs at issue promised to “pay fifty percent (50%) of the group medical insurance program premium for each retiree and dependents, if any, presently enrolled and for each retiree in the future…” This provision provided not only for “each retiree” during the term of the MOU but also for “future” retirees. With this express language, the MOUs were ratified by the city council. Consequently, then-active employees’ vested right to future retiree medical insurance premium benefits was expressly authorized legislatively.

Having found that the language of the MOU can be interpreted reasonably to provide future retiree medical insurance benefits expressly the appellate court had no reason to consider whether, under Retired Employees, there was an implied contract. Nonetheless, it applied the holding of Retired Employees that contracts between municipal governments and their employees are to be interpreted by the same rules as private contracts unless the Civil Code provides otherwise.

In the MOUs at issue here, the City promised to pay 50 percent of the medical insurance premiums of not only the “retiree” but also for “for each retiree in the future.” Regardless of what different language in other MOUs in other cases may have been interpreted to mean, the most reasonable interpretation of this language is that the City committed itself to pay 50 percent of medical insurance premiums “in the future” on behalf of then-active employees when they retired.

DISPOSITION

Applying Retired Employees the appellate court concluded that the trial court erred by sustaining the demurrer because the petition alleged that the MOUs ratified by the city council promised active employees that the City would pay 50 percent of their future retiree medical insurance premiums.

ZALMA OPINION

The City and the IBEW may now take the case to trial although the appellate court decision may make the trial decision obvious to the trial court.

Governmental agencies in California must be very careful in the promises they make to their employees. Agreeing to pay half of the insurance premium for every employee who worked only five years for the entity for the rest of the employee’s life seems less than practical. The revision to pay two percent for each year of service up to 50 percent seemed more reasonable but because of the earlier actions of the City of Redding, the citizens of that city will be called upon to pay half of increasing costs of health insurance.

Governments in California have made bad deals with its employees that they now cannot fulfill. They are, like the City of Redding, trying to get out of these deals only to find that the California Supreme Court and the Courts of Appeal will enforce those bad deals whether the the entity can afford to pay for the deal or not. Taxes in California will continue to go up and governmental entities will find there are less and less taxpayers to pay for the benefits promised. They should all ask if they were under the influence of a controlled substance when they made the deal and must be prepared to never make such a deal again.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Coverage for Disparagement Under CGL

Coverage for Advertising Injury Requires Actual Disparagement

The purpose of liability insurance is to protect the person or entity insured against the risk of loss by suits for risks of loss accepted by the insurer. Most general liability policies provide broad coverages with few limitations. However, no insurance policy covers against every policy risk of loss. In Hartford Casualty Insurance Company v. Swift Distribution, Inc. et al, No. B234234 (Cal.App. Dist.2 10/29/2012) the California Court of Appeal was asked to determine whether the “advertising injury” provision of an insurance policy required the insurer to provide a defense for its insured against a claim that the insured company’s advertisements disparaged another company’s products.

FACTS

Specifically, in an underlying action, Gary-Michael Dahl (Dahl), who manufactured and sold the “Multi-Cart,” sued Swift Distribution, Inc., dba Ultimate Support Systems, Inc., Michael Belitz, and Robin Slaton (Ultimate), for patent and trademark infringement, unfair competition, dilution of a famous mark, and misleading advertising arising from Ultimate’s sale of its product, the “Ulti-Cart.” Ultimate tendered defense of Dahl’s action to its insurer, Hartford Casualty Insurance Company (Hartford), which refused to defend it in the Dahl action. In a subsequent action for declaratory relief against Ultimate, Hartford sought a declaration that it had no duty to defend or indemnify Ultimate in the Dahl action. The trial court granted Hartford’s motion for summary judgment and Ultimate appealed.

Hartford’s policy defined “personal and advertising injury” in several ways. One definition of “personal and advertising injury” was “injury . . . arising out of . . . [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services[.]“

THE SUIT

Dahl filed an action against Ultimate, Dahl v. Swift Distribution, Inc. in U. S. District Court, Central District of California. The Dahl complaint alleged that Dahl owned a U.S. patent to a “convertible transport cart,” which he had sold as the “Multi-Cart” collapsible cart since 1997. The Multi-Cart can be manipulated into eight configurations, and is used to move music, sound, and video equipment quickly and easily. The U.S. Patent and Trademark Office issued a patent to Dahl for the “Multi-Cart” mark. The Dahl complaint alleged that Ultimate impermissibly manufactured, marketed, and sold the “Ulti-Cart,” which infringed patents and trademarks for Dahl’s Multi-Cart and diluted Dahl’s trademark. The complaint attached advertisements for the Ulti-Cart, which do not name the Multi-Cart, Dahl, or any other products other than the Ulti-Cart.

While the Hartford complaint was pending, counsel for Ultimate notified counsel for Hartford that the court in the Dahl action granted Ultimate’s motion for summary adjudication as to Dahl’s two patent infringement claims. Subsequently counsel for Ultimate notified counsel for Hartford that the Dahl action had settled.

The trial court entered an order granting summary judgment in favor of Hartford and denying Ultimate’s motion. The judgment entered in favor of Hartford determined that Hartford had no duty to defend or indemnify Ultimate in the Dahl action.

ISSUE

Ultimate claims on appeal that the Dahl action alleged facts that constituted the potentially covered offense of disparagement. Liability insurance imposes on the insurer both the obligation to indemnify the insured against third party claims covered by the policy and to defend such claims against its insured by furnishing competent counsel and paying attorney fees and costs. The duty to defend is generally determined from all the information available to the insurer when the defense is tendered, although later developments may also affect the insurer’s duty to defend.

The insurer must defend against a suit that potentially seeks damages within the coverage of the policy. The potential or possibility of coverage triggers the duty to defend. A determination whether the insurer owes a duty to defend is made in the first instance by comparing allegations of the complaint with policy terms. Facts outside the complaint may give rise to a duty to defend when they reveal a possibility that the policy may cover the claim. (Montrose Chemical Corp. v. Superior Court (1993) 6 Cal.4th 287, 295.)

The duty to defend is broad, but not unlimited. The nature and kinds of risks covered by the policy define its scope. The insurer need not defend where extrinsic facts eliminate the potential for coverage despite allegations in the complaint which suggest potential liability and where the third party complaint can by no conceivable theory raise a single issue which could bring it within the policy coverage.

The insurer must establish the absence of a potential for coverage; it must prove that the policy cannot provide coverage of the underlying claim.

The Hartford policy provided insurance coverage for “‘personal and advertising injury’ caused by an offense arising out of your business[.]” The policy defined “personal and advertising injury” to include “injury . . . arising out of . . . [o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”

This provision provides coverage for product disparagement, which is an injurious falsehood directed at the organization or products, goods, or services of another. Disparagement, or injurious falsehood, may consist of publication of matter derogatory to plaintiff’s title to his property, its quality, or his business. Tortious product disparagement involves publication to third parties of a false statement that injures the plaintiff by derogating the quality of goods or services.

The injurious falsehood must specifically refer to the property, business, goods, product, or services either by express mention or reference by reasonable implication. Dahl’s complaint, application for a temporary restraining order, and responses to Ultimate’s discovery do not allege that Ultimate’s advertisements specifically referred to Dahl by express mention.

Ultimate argues that Dahl’s complaint alleged that Ultimate’s use of “Ulti-Cart,” a name similar to Dahl’s “Multi-Cart,” referred to Dahl and Dahl’s product by reasonable implication. Dahl’s complaint primarily alleged that because of its similarity to Dahl’s “Multi-Cart,” Ultimate’s use of the “Ulti-Cart” name misled the public into believing that Ultimate’s products were the same as Dahl’s, were approved by Dahl, or were affiliated with Dahl’s “Multi-Cart” products.

Ultimate’s advertisements referred only to its own product, the Ulti-Cart, and did not refer to or disparage Dahl’s Multi-Cart. Dahl’s complaint alleged that by using a product name (Ulti-Cart) that was very similar to Dahl’s Multi-Cart product, Ultimate deceived the public that Ultimate was the originator, designer, or authorized manufacturer and distributor of its infringing products. This, however, was not disparagement. Because Dahl did not allege that Ultimate’s publication disparaged Dahl’s organization, products, goods, or services, Dahl was precluded from recovery on a disparagement theory.

The Dahl complaint did not allege that Ultimate represented itself as the only holder of the Multi-Cart trademark, implied that Ultimate had a right to use the Multi-Cart trademark that was superior to that of Dahl, or represented that Dahl did not have rights to the Multi-Cart trademark. The Dahl complaint did not allege disparagement by implication, and no potential for coverage triggered Hartford’s duty to defend Ultimate in the Dahl action.

DISPOSITION

Ultimate’s advertisements did not expressly refer to Dahl’s Multi-Cart and did not “disparage” Dahl’s Multi-Cart product or business, and there was no coverage or potential for coverage for “advertising injury” under the Hartford insurance policy. Thus Hartford had no duty to defend Ultimate in the Dahl action, and the trial court correctly granted summary judgment for Hartford. We affirm the judgment.

ZALMA OPINION

Insurance protects the person or entity insured from many risks of loss. It does not insure against every possible suit. In this case the insured attempted to stretch the meaning of the allegations of the complaint to include a disparagement that did not occur by claiming the disparagement was by implication. They did so after the suit was settled and the defense costs were spent to recover the amounts spent thereby arguing coverage by contradicting the defense mounted in the underlying action. The court saw through the attempt and found that there was no duty to defend since there was no disparagement.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Today Is Election Day — Vote

If you are a citizen of the United States and eligible to vote please do your duty to your country and vote.

I will vote this morning shortly after the polls open and hope that every reader of this blog does the same.

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No Coverage for Damage by Chinese Drywall

Plain Meaning of Insurance Contract Applied

People who bring both tort claims for damage while simultaneously suing an insurance carrier for coverage may find that the evidence produced for the tort claim eliminates any possibility of coverage under a policy of insurance. To prove a case against the manufacturers and installers of infamous Chinese Drywall it was essential that the plaintiff prove that the drywall was defective, that it out gassed sulfuric gases that corroded metal also worked to defeat coverage for the damage caused under a homeowners policy.

The issue of how an insurance policy in Virginia would be resolved the Fourth Circuit Court of Appeal, asked the Supreme Court of Virginia to help it in Travco Insurance Company v. Larry Ward, Supreme Court of Virginia by Justice S. Bernard Goodwyn, November 1, 2012,  Record No. 120347 who answered the following questions posed to the Supreme Court to resolve a question of Virginia law:

For purposes of interpreting an “all risk” homeowners insurance policy, is any damage resulting from this drywall unambiguously excluded from coverage under the policy because it is loss caused by:

        (a) “mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage itself”;

        (b) “faulty, inadequate, or defective materials”;

        (c) “rust or other corrosion”; or

        (d) “pollutants,” where pollutant is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste?[”]

Background

Larry Ward sought coverage under his homeowners’ insurance policy issued by TravCo Insurance Company (TravCo) for damages allegedly caused by sheets of drywall manufactured in China (Chinese drywall) that were installed in his home during its construction. TravCo denied Ward’s claim and brought an action in the United States District Court for the Eastern District of Virginia, seeking a declaratory judgment that Ward’s homeowners’ policy did not provide coverage for such losses.

TravCo moved for summary judgment, and the district court granted the motion on the basis that the policy did not provide coverage for the damages allegedly caused by the drywall in Ward’s residence because of certain policy exclusions. Ward appealed the ruling of the district court to the United States Court of Appeals for the Fourth Circuit, which certified to this Court the question of whether the policy exclusions are applicable to Ward’s claimed losses.

Facts

In May 2007, Ward purchased a newly constructed home located in Virginia Beach and shortly thereafter obtained a home insurance policy from TravCo. The policy was effective from May 7, 2007 to May 7, 2008, and was renewed through May 7, 2010. In May 2009, Ward experienced problems with the home and hired an expert, Zdenek Hejzlar, Ph.D., who determined that the problems were caused by Chinese drywall installed in the house during construction. Ward thereafter filed a complaint against the developer, builder and drywall contractor in the Circuit Court of the City of Norfolk. Ward alleged that the Chinese drywall in his home emitted various sulfide gases and/or toxic chemicals through “off-gassing” that created noxious odors and caused health issues, damage and corrosion. He alleged breach of contract, breach of warranties, negligence, unjust enrichment, nuisance, and other counts claiming that his home “was built with defective drywall.”

Ward subsequently filed a homeowners’ claim with TravCo in September 2009; he stated that the drywall caused fumes and odors, health issues, and damage to the home’s air conditioning system, garage door, and flatscreen televisions. Ward submitted to TravCo a report detailing the condition of his home, prepared by Dr. Hejzlar. Dr. Hejzlar reported a sulfuric odor in the home and confirmed the presence of Chinese drywall. He also noted damage to the HVAC coils and other metallic surfaces in the home and noted that the damage was associated with sulfur emissions from the Chinese drywall.

TravCo thereafter denied Ward’s claim, alleging that the damage caused by the Chinese drywall was excluded from coverage by the terms of Ward’s homeowners’ policy. Relevant to the certified question are exclusions in the policy for loss caused by:

  1. latent defect;
  2. faulty, inadequate, or defective materials;
  3. rust or corrosion; and
  4. pollutants, defined to include any gaseous irritant or contaminant.

Analysis

Virginia Courts, like those of every state, interpret insurance policies, like other contracts, in accordance with the intention of the parties gleaned from the words they have used in the document. Each phrase and clause of an insurance contract should be considered and construed together and seemingly conflicting provisions harmonized when that can be reasonably done, so as to effectuate the intention of the parties as expressed therein.

Insurers are required to draft exclusions limiting coverage in language that clearly and unambiguously defines their scope. However, 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 because the rule only applies if there is a true ambiguity.

Because there is no ambiguity in the phrase “latent defect, inherent vice, or any quality in property that causes it to damage or destroy itself,” the Virginia Supreme Court concluded it need not look beyond the plain meaning of the policy language to determine whether it excludes damage caused by the Chinese drywall from coverage.

The Virginia Supreme Court refused to apply canons of construction to create ambiguity where there is none. In the past Virginia defined “latent defect” as: “A defect not manifest, but hidden or concealed, and not visible or apparent; a defect hidden from knowledge as well as from sight; specifically, a defect which reasonably careful inspection will not reveal; one which could not have been discovered by inspection.”

The faulty, inadequate or defective materials exclusion states that TravCo does not insure for loss caused by: “Faulty, inadequate or defective . . .[m]aterials used in repair, construction, renovation or remodeling . . . of part or all of any property whether on or off the ‘residence premises.’ ” The drywall is clearly defective. In fact, Ward himself described the drywall as defective in his circuit court complaint and interrogatory answers. Therefore, the “faulty, inadequate, or defective” materials exclusion is applicable to damage resulting from the Chinese drywall.

The corrosion exclusion bars coverage for the damaged metals in Ward’s home in that there is no dispute that such damage was caused by corrosion. To construe this exclusion, the court applied the plain meaning of the terms “rust or other corrosion.” Because the exclusion is readily understood in accordance with the plain meaning of its language, this Court need not employ extraordinary canons of construction. Rust is defined as a coating formed on metal by oxidation or corrosion, and senses relating to corrosion or deterioration.

Corrosion is defined as the action, process, or effect of corroding: as the action or process of corrosive chemical change not necessarily accompanied by loss of form or compactness; typically: a gradual wearing away or alteration by a chemical or electrochemical essentially oxidizing process (as in the atmospheric rusting of iron. Ward’s expert submitted an affidavit that concluded: “The corrosion of metal in the Ward . . . residence[] results from exposure to reduced sulfur gases being emitted from the Chinese drywall and interacting with the metal.” This statement undoubtedly reflects a process of corrosion.  The term “loss . . . [c]aused by . . . rust or other corrosion,” is unambiguous and when interpreted according to its plain meaning, encompasses the corrosion caused by the off-gassing of sulfur from the Chinese drywall in Ward’s home.

The pollution exclusion at issue in this case provides that TravCo does not insure for loss caused by: “Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by peril insured against under Coverage C. Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or claimed.”

The sulfur gas in Ward’s house was a contaminant because it was not “supposed to be” in the home and it caused harm. The sulfur gas is likewise an irritant because it caused Ward and his family to suffer nosebleeds and other problems. The sulfuric gases moved from the drywall to the air in the home by way of discharge, dispersal, seepage, migration, release or escape.

The issue of whether the sulfuric gases contaminated the air in the Ward home due to discharge, dispersal, seepage, migration, release or escape is likewise aided by the report and affidavit of Ward’s expert which referenced the “reduced sulfur gases being emitted from the Chinese drywall.” The sulfuric gases at issue in this case were a pollutant within the purview of the exclusion, and we hold that the pollution exclusion is applicable and unambiguously excludes from coverage any damage resulting from the emission of gas from the drywall.

All parts of the certified question were, therefore, answered in the affirmative and there could be no coverage for Ward under the terms and conditions of the policy.

ZALMA OPINION

The Virginia Supreme Court, like courts across the country, used the tried and true method of interpreting an insurance contract – if the language is clear and unambiguous it must be applied.

Plaintiffs must not be greedy. In this case the plaintiff sought to both recover in tort and to recover from his insurance company. The evidence he collected to recover from the manufacturers and installers of the drywall was sufficient to defeat his insurance claim. Just because insurance companies are not well liked by the public a policyholder should never try to get a court to rewrite the policy after a loss when the language is clear and unambiguous. Ward has a great case against the manufacturer and builder and should have limited his efforts to recover from 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Life Insurance Proceeds Not “Damages”

Right of Reimbursement Limited

People buy life insurance to protect the interests of their heirs and stated beneficiaries. People do not buy life insurance to protect a workers’ compensation insurer who pays none of the premium. A workers’ compensation insurer in Vermont asked that the Supreme Court of Vermont interpret a state statute to allow the workers’ compensation insurer to obtain reimbursement of death benefits it has paid when a claimant’s beneficiary also receives proceeds from a life-insurance policy in
Estate of Monica Dunn v. Windham Northeast Supervisory Union, 2012 Vt. 93 (Vt. 10/26/2012). The state statute is similar to the Federal statute allowing Medicare to be reimbursed from a tortfeasor’s insurer for amounts paid to the Medicare beneficiary.

FACTS

The underlying facts are not disputed. Claimant was an employee of Windham Northeast Supervisory Union. In October 2009, claimant died of complications from surgery to treat a work-related knee injury. Windham’s workers’ compensation insurer, the Vermont School Boards Insurance Trust, began paying workers’ compensation death benefits to her estate. Claimant also held a life insurance policy, which named her husband as her beneficiary. The plan provided for a lump-sum payment upon proof of her death, as well as payments of $3000 a year per child for up to four years while the children attended college.

Windham/VSBIT sought reimbursement of the death benefits it had paid, and a credit against future benefits, to the extent of claimant’s husband’s receipt of life-insurance proceeds. Windham/VSBIT argued that claimant’s receipt of both workers’ compensation and life-insurance proceeds was the type of double recovery the statute was designed to prevent.

Claimant’s estate countered that the reimbursement provisions apply only to money employees recover from third parties who are responsible for their injuries. The Commissioner, agreeing with claimant’s estate, concluded an employer’s right to workers’ compensation reimbursement attaches only to damages received from a third party tortfeasor.

Even if the statute were construed to permit reimbursement out of proceeds from any third party, including a life insurer, life-insurance payments made to claimant’s beneficiaries did not constitute “damages,” which the Commissioner defined as “a sum of money awarded to a person injured by the tort of another.”

ANALYSIS

Vermont’s workers’ compensation reimbursement statute provides, in relevant part, that:

       (e) In an action to enforce the liability of a third party, the injured employee may recover any amount which the employee . . . would be entitled to recover in a civil action. Any recovery against the third party for damages resulting from personal injuries or death only . . . shall first reimburse the employer or its workers’ compensation insurance carrier . . . . Reimbursement required under this subsection, except to prevent double recovery, shall not reduce the employee’s recovery of any benefit or payment provided by a plan or policy that was privately purchased by the injured employee, including uninsured-under insured motorist coverage, or any other first party insurance payments or benefits.

Windham/VSBIT contends principally that claimant’s life insurer is a “liable” third party under the statute and that the proceeds it paid constitute a “recovery of damages” that is subject to reimbursement to prevent an insured’s double recovery from a first-party insurance benefit.

The conclusion regarding the scope of an employer’s right to workers’ compensation reimbursement is in keeping with Vermont’s long-standing interpretation of the statute. The reimbursement statute aims to create a fair result for all parties. When a third party is found responsible in a personal injury action for damages suffered by the worker, the worker is not permitted double recovery. Rather, the law evens out the consequences by permitting the workers’ compensation carrier to recoup the benefits it paid the worker.

Here, claimant’s family has received life-insurance proceeds deriving from the insurer’s contractual obligation to make payment upon the occurrence of a specified event. Claimant’s beneficiaries received the life-insurance proceeds because she died, not because of a third party’s actions. There is no third party whose malfeasance would occasion the need to more equitably distribute financial responsibility for claimant’s injury.

Payments on a life insurance policy are not contingent on a third party’s wrongdoing, nor are they necessarily directly linked to a quantifiable, compensable harm, either economic or non-economic. They are contractual benefits paid simply upon proof of death. To be sure, people purchase life insurance to insulate beneficiaries from the economic impact of lost wages or burial costs, which workers’ compensation death benefits partially address. The purpose of life insurance is not contractually limited in any way, or conditioned on, compensating such readily ascertainable economic losses.

The Supreme Court concluded that the workers’ compensation reimbursement provisions must be read as a harmonious whole. Taking the statutory language as a whole, the Supreme Court concluded that a workers’ compensation carrier is entitled to reimbursement only when a claimant or – in this case, a claimant’s estate – receives money for damages because of a third party’s responsibility for an injury. This is the case whether the claimant receives payment directly from the tortfeasor or, as happens frequently, from the third party’s own liability insurer.

In sum, the statute does not permit a workers’ compensation insurer to tap a claimants’ life-insurance proceeds for reimbursement because the proceeds of that particular type of first-party policy do not constitute damages paid because of a third party’s action.

ZALMA OPINION

What is amazing is that a workers’ compensation insurer would consider life insurance proceeds to be “damages” in any interpretation of the word. Insurers always have a right of subrogation when it pays an insured for injuries caused by another. It does not have a right to deprive the injured or deceased worker from obtaining the benefits of a life insurance policy the worker had the good sense to buy with the workers’ own funds that was in no way tied to the tortious conduct of another.

The Vermont Supreme Court interpreted its statute fairly and avoided an injustice.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Claims in A Catastrophe

Claims In A Catastrophe

© 2008 Barry Zalma
ClaimSchool, Inc.

In 2008 I wrote this article to help those faced with catastrophic losses. I reprint it here because of Hurricane Sandy in hopes it will help those victims of that catastrophe deal with their claims.

Presenting a Claim

If your house was damaged or destroyed by the fire, windstorm, or flood as a result of state declared catastrophes and you had a fire, homeowners, flood insurance, tenant’s homeowners or condominium policy you will be dealing with an insurance adjuster. You should recognize that dealing with an insurance adjuster in a catastrophe is usually fairly easy because of the number of claims the adjuster is required to deal within a short time.

Insurers will be in a very generous mood. They will be seeking good publicity by taking care of victims of the catastrophe quickly and fairly. To make the claims process go easily the insured person must understand that both the insured and the adjuster have duties when damage-caused by fire, windstorm, flood or other insured perils are discovered. The following list outlines the most important of these duties:

  1. You should be sure there is no unnecessary delay in reporting the fact of the discovery of damage to your insurer as a claim.
  2. You and the adjuster should establish that there is no unnecessary delay in responding to any fire, fire fighting, flood or water-related cause of loss where “mold” may result as a natural result of water, warmth, and existence of mold spores in all building.
  3. You may be asked to sign a non-waiver agreement.
  4. You may receive a reservation of rights letter advising you of your duties under the policy, the conditions that apply or might apply, and the exclusions that may apply to the facts of the loss.
  5. You, as the insured, should readily, and without objection, sign the non-waiver agreement or accept the reservation of rights as an expression of the status quo.
  6. The adjuster should remind you, as part of the reservation of rights letter and explanation of the duties of the insured, to preserve and protect the damaged property and to mitigate the loss with due diligence and dispatch.
  7. You can request from the adjuster the identity of respected, competent, and professional contractors experienced in fire reconstruction or the drying out of buildings and the prevention or restriction of further loss including mold growth.
  8. You should follow up regularly with the adjuster to ensure that he or she is meeting contractual obligations since a catastrophe often makes communications difficult.
  9. If you have failed to protect the property from further loss, the adjuster must remind you, in writing, of your failure and how that could effect your claim.
  10. The adjuster should consider advance payments to avoid any unnecessary difficulties so that you and your family will have a place to live while your house is being rebuilt.
    1. You can expect an advance of $10,000 to $20,000 if your house is destroyed to carry you over
    2. Even if your house was not damaged you are entitled to additional living expense payments if you were ordered out of your house by the state government, federal government
    3. Homeland Security, or the local fire department.
    4. Remember that additional living expense coverage does not pay all of your post loss expenses, only those over and above your normal expenses.

Insurance claims require personal attention to detail by the insured. You and the adjuster must meet in person. If the claim is to be resolved expeditiously and fairly, both you and the adjuster should work to establish a personal relationship and to resolve, if coverage is available, the problems caused by the damage to the dwelling or business structure.

Once the rights, obligations, and duties of the insured and the insurer have been stated, and the initial investigation is complete, the insurer is obligated to conduct a prompt analysis of the policy wording and the law to determine whether coverage exists for the damage claimed. Once the investigation is complete and the decision made, it is the adjuster’s obligation to advise you, promptly and in detail, of the decision of the insurer. If coverage is available, it is also the obligation of the adjuster to advise you of your duties and obligations to obtain complete indemnity from the insurer and to protect the property from further loss.

The Notice of Loss

If you believe that your property was damaged or destroyed by a peril insured by your policy you should call or write the insurance agent, broker or insurer immediately (or as soon as practical) to report your claim. Follow up the phone call with a fax, an email, and a letter. If the house was not destroyed but a great deal of fire fighting water or subsequent rain or flood water entered the property try to get a remediation team into the home or business within the first 48 hours to begin drying out the property. If you do not know one ask your insurer for a referral. This is crucial to preventing or containing mold growth and rot. If the agent, insurance company, independent adjuster, or restoration company delays the claim, follow up with a fax, an email, and a letter confirming their delay in responding. It would be helpful to send copies of the follow-up letters to the consumer protection unit of the state’s Department of Insurance.Take detailed notes of every conversation, including the name, company, phone number, address, and job title of every insurance adjuster, representative, consultant, and contractor you deal with. Confirm all agreements in writing and insist that appointments and deadlines be honored. Keep a log of all notes and letters and ask for and keep business cards from everyone involved in your claim.

Immediately after the telephone call, write a letter to the broker or agent, with a copy to the insurer, providing the same information. The letter need not be formal. It can be handwritten on any available paper. Make a photocopy.

The notice of loss should include the following information:

•    Your full name.

•    The location of the property.

•    The policy number.

•    The effective dates of the policy.

•    The date when damage first occurred.

•    The type of property damage.

•    The cause or causes of the damage.

•    How the adjuster can contact you.

•    That you need immediate contact from the adjuster.

By providing the information to the agent, the broker and/or the insurer you have fulfilled the first obligation under the policy: to provide immediate notice of loss to the insurer.

If the insurer is working effectively and has a catastrophe team of adjusters in place you should receive contact from an adjuster within 24 hours of the notice. The first call should arrange an appointment to inspect the property. You should arrange for inspection as soon as possible and have the entire property available for the inspection if possible. If emergency efforts are required, you should so advise the adjuster so that he or she can help you take emergency measures to protect against further loss.

If possible, you or the adjuster should arrange to have one or more contractors present at the first meeting to determine the extent of the damage. If the damage is extensive, consider retaining the services of a public insurance adjuster [if you determine a public insurance adjuster would be helpful, it is appropriate to seek one who is a member of the National Association of Public Insurance Adjusters (NAPIA), a professional membership organization that seeks to instill professionalism in the trade] or an attorney experienced in representing policyholders in the claims process to represent your interest. The lawyer will usually work on an hourly fee basis while the public insurance adjuster will expect a percentage of the amount paid by the insurer. You must recognize that the public insurance adjuster will ask for a 10 – 15% negotiable fee. Do not hesitate to negotiate with the public insurance adjuster. Never pay the first fee quoted. Considering the volume of work in a catastrophe, you should be able to negotiate a fee between 3% and 10%.

Insurance Company Response

Your insurer should respond to typical catastrophe claims by written or verbal contact within 24 hours of your notice of the claim. The insurer should share information regarding emergency repairs, additional living expenses, temporary advance payments and prevention of further loss with you.

Your insurer should, and in California is obligated to, advise you of your responsibilities under the policy. Many require their representatives to be at your home within 24 to 72 hours of notice of claim. If you explain that your fire loss is severe, the insurer should attempt to have a representative at your house within 24 hours.

The insurer is obligated by statute, state administrative regulations, or by the terms of the policy to determine whether your claim is covered and provide an initial estimate of damage within seven to 14 days after the insurer’s first on-site visit. This first estimate is subject to change. Within the same time frame, your insurer should attempt to provide you with a written statement confirming or denying coverage. These time limits are usually waived in catastrophes and may be impossible to meet with regard to Hurricane Katrina event and other massive catastrophes. You should expect your insurer to return all phone calls within 24 hours. Initial contact may be with your insurance agent or broker or a claims office or the toll-free phone number included in the policy. Because of the volume of claims after a catastrophe like those in the 2005 hurricane season and the 2008 California wild fire season, this time frame will probably not be feasible.

First Contact with the Adjuster

Your first contact with the adjuster is usually an informative meeting where you discuss the cause of the loss, the type of loss, when the loss was discovered, and make an initial effort to agree on a tentative scope of loss.
You should expect the adjuster to do the following:

  1. ask for a walk-through inspection of the entire dwelling or building.
    1. You should make every effort to point out each item of damage or suspected damage during the walk-through inspection
    2. You, or your representative, should assist the adjuster in viewing both the damage and the source of the damage;
  2. ask you to submit to a recorded statement;
  3. ask you for the identities of each family member or vendor who can give the adjuster information about the loss;
  4. ask for the recorded statements of the persons identified;
  5. ask permission to allow experts retained by the insurer to inspect the property and do minor destructive testing to establish the appropriate methods of reconstruction and repair; and
  6. ask permission to contact others who know information about the loss and to obtain from those people within your control a detailed recorded statement and documents relating to their knowledge of the loss and the extent of the loss.

First Meeting with the Adjuster

An adjuster is a person professionally trained to assess the damage to your property. He or she will probably visit your home or business before you are asked to complete any forms. The more information you have about your damaged home or business and belongings, the sooner your claim will be settled. Your adjuster generally will come prepared to do a thorough and complete evaluation of the damage to your property. If the adjuster is unable to complete a thorough inspection due to time constraints or the extent of damage, he or she should prepare a scope of the loss report. This is a brief listing of the findings of damage determined at the initial inspection of the damage. The adjuster should ask you to agree to the scope of loss. Agreeing to a scope of loss is not presenting a claim. It is understood by the adjuster that the scope is incomplete and will be added to as new damage is discovered. It is usually supplemented with a second visit after the reports of experts are received to complete the inspection.

The “scope of loss” should include the following:

  • degree of damage;
  • a description of each location where damage was observed;
  • a description of the adjuster’s and your own best estimates of the type of damage observed;
  • a list of all personal property damaged or destroyed;
  • quality of the materials and workmanship; and
  • measurements needed to calculate quantities, including length, width, and height of rooms and the number of “openings” (windows and doors) in each room.

The scope of loss, usually referred to by claims people as the “scope,” differs from the finished estimate in two ways the scope does not necessarily list any prices, although prices can be used to describe quality
the scope does not list the calculated quantities; it includes just the raw counts and measurements needed to calculate quantities for the estimate.

Protect All Property from Further Damage

Every policy requires that the insured protect the property from further loss. Therefore, you should turn off any water flow to broken appliances or pipes, arrange to have openings in roofs or walls covered to protect from rain damage, and seek help from the adjuster to further protect your property from losses of all types.

Take any necessary emergency measures to protect the building and personal property from any further damage. Do not throw anything away until permission of the insurance company is obtained in writing and you have documented its condition unless the damaged property presents a hazard to the health or safety of your family or others.

If the insurer delays or refuses to authorize measures to prevent further loss, confirm the insurer’s delay in a fax, email, and a letter, and take whatever reasonable measures you can afford to protect the property. If your loss is covered, the insurance company should also cover the cost of any reasonable emergency measures you took to protect your property. It is not unusual for an insurer to deny coverage for damage resulting after the initial claim on the grounds that an insured failed to comply with the policy condition to protect the property from further damage.

Document the Loss

If you were prudent and prepared, before the catastrophe, an inventory of your contents or took pictures of your contents, provide the adjuster with the inventory and photographs or videotape. Photograph, videotape, and inventory all damaged property after the loss. Make sure you record the date of the photos and videotape. It is important to document the source and the extent of damage whether by fire or water intrusion.

In most states, a material misrepresentation, concealment, or omission made in connection with the claim will give the insurer a valid reason to reject the entire claim. For example, claiming that an item was destroyed that really wasn’t or substantially overstating the value of a damaged item is fraud. In most states insurance fraud is a felony that can place you in state prison if convicted. No catastrophe is so bad as to cause you to attempt to defraud your insurer to make up for uninsured losses. You should never exaggerate, speculate, or guess about the loss or value of any particular piece of property. Make it clear to your insurer when recollection may not be accurate, when you are estimating value, and the basis for your estimate. For the value of items you are not sure about on a claim presentation, use the phrase “To Be Determined.” If you do not have receipts to show the price of an item, information can be found in catalogs, statements from retail clerks, bank statements, credit card statements, or statements from family members or friends.

If all else fails, a formal appraisal can be obtained from a professional personal property appraiser. Save this as a last resort, since the insurer will usually refuse to reimburse you for the costs of hiring an appraiser, but may hire one at no cost to you if asked courteously.

You Must Cooperate with the Insurance Company’s Investigation and Handling of the Claim

You have a contractual obligation to cooperate with the insurer in its investigation and handling of the claim. However, you never have an obligation to allow yourself to be abused. In most states the insured and the insurance company have a mutual obligation to act in good faith and deal fairly with each other to investigate and process the claim. This means that both should avoid taking any unreasonable position or doing or saying anything that would in any way frustrate each other’s rights under the policy. The insurer may require one or more recorded statements from you. Always request a copy of the tape and a transcript of the statement to review. When the recording is complete, ask the adjuster to break out the tab so that nothing can be recorded over the tape and place your signature and date on the tape label. Ask the adjuster to similarly place his or her signature on the tape. You have a right to review and correct the transcript of any recorded statement.

You may also be required to appear for an “Examination Under Oath” (EUO). The insurer may, but is not required to, hire an attorney to take the EUO to represent the insured. Since a lawyer is not required, however, the insurer will not pay for the attorney that is representing you. The EUO is a contractual obligation and there is usually no clause in the insurance policy promising to pay a lawyer to help the insured make a claim against an insurer. You should not appear for an EUO until you understand all rights, the insurance coverage, and the full extent of the claim, or until counsel is retained. Do not refuse to appear at an EUO or the insurer may reject the claim because such refusal is a breach of a material condition of the policy. You may reasonably request a delay in appearance at an EUO to obtain the services of counsel or a public insurance adjuster.

The insurer may ask you to make available various documents related to the claim, including banking statements, investment reports, receipts, and other personal financial documents. You are required to produce any documentation reasonably related to the insurer’s investigation of the claim that can include tax returns. In some states, tax returns are considered privileged and the insured cannot be compelled to produce them, while in other states the failure to produce tax returns is sufficient cause to deny the claim. [See Barry Zalma, Insurance Claims: A Comprehensive Guide, (Specialty Technical Publishers, 2002): Chapter II-5.] The insurer can require you to produce these kinds of documents as long as they are reasonably related to its investigation. You should not provide these documents to the insurer until you understand the rights, duties, and obligations imposed by the insurance coverage and the full extent of the claim. You should never refuse to produce documents unreasonably since the requirement for document production is a condition precedent to the insurer’s obligation to provide a defense and/or indemnity to you.

Proof of Loss Requirement

Most first party property policies require that you submit a sworn proof of loss form to the insurer within a certain amount of time, either after the loss or after being provided the proof of loss form. During a catastrophe, especially when total losses are involved, insurers will often waive this requirement.

Flood insurance policies require the proof of loss within sixty days of the loss and are applied in a draconian fashion. If you cannot produce a proof of flood loss within 60 days of the loss obtain an extension of time, in writing from the adjuster, or you will lose all rights under the policy to indemnity.

The National Flood Insurance Program, on September 21, 2005, announced that it  is waiving proof-of-loss requirements for victims of Hurricane Katrina and will instead rely on claims adjuster reports, aerial photography, and information on water depths to help expedite the process of paying claims, the Federal Emergency Management Agency said.

According to the NFIP, information from underwriting files will be used in concert with photographic and topographical data to determine where it is readily apparent that a covered property’s flood damage has exceeded the amount of coverage purchased. The process would allow claims to be paid on homes that have been washed off their foundations, have been inundated by standing water for extended periods of time, or where only a slab or the home’s pilings remain, even where no formal site visit has been conducted.

In most states you are contractually obligated to submit the sworn proof of loss within the time limit (usually 60 days from the date of request), or at least to substantially comply with the requirement, unless the insurer agrees to dispense with the sworn proof of loss or extend the time. You should not submit the sworn proof of loss to the insurer until you understand all of the rights and obligations imposed by the policy, the insurance coverages, and the full extent of the claim. It is not unusual for an insurer to consider mistakes in the sworn proof of loss (since they are sworn to under oath) as intentional misrepresentations sufficient to allow it to reject coverage for a claim. A statement made under oath cannot, by definition, contain an innocent misrepresentation. Never sign a sworn proof of loss, even if your lawyer or professional public insurance adjuster prepares it, until you have carefully read every word and are certain that the statements made are true.

Some insurers believe that, at some point, you will refuse to comply with their requests. If you refuse to comply with reasonable requests for a recorded statement, an EUO, a sworn proof of loss, or documents reasonably related to the insurer’s investigation, you may give the insurer a valid excuse to deny the claim based on your breach of the duty to cooperate. If you believe that any requests made by the insurer are unreasonable, ask the insurer to explain the reason(s) for the requests in writing. Err on the side of caution and provide all documents that have some reasonable connection to the policy or loss. Before giving an insurer a reason to deny a claim because of your failure to cooperate, consult with a policyholder attorney, a public adjuster, or the state Department of Insurance before refusing a request that may, in retrospect, turn out to have been reasonable.

Get a Second Opinion

Many insureds believe that insurers make a practice of making inadequate (sometimes called “lowball”) offers of settlement. They are wary of what they think are estimates from insurance-company-friendly contractors. Whether true or not, it is a good practice to get a second, or even a third, written estimate to repair and replace damaged property from reputable, independent professionals that you would hire to do the repairs if there was no insurance. You are entitled to have the damaged property replaced with “like kind and quality.” This means that you should insist that the amount determined to be the amount of loss is sufficient to replace the property with property of like kind and quality to the damaged property. When you cannot match the remaining undamaged tile, wallpaper, carpeting, or other portions of undamaged property, you are usually entitled to have the entire “line of sight” replaced to match. For example, if a broken water pipe destroys the hardwood floor in a kitchen and does no damage to the contiguous hardwood floor in the adjoining family room, the insurer is required to replace both the damaged and undamaged floors so that they match as long as they are in a continuous line of sight.

Some losses are paid on an actual cash value (ACTUAL CASH VALUE) basis, which in some states means either the fair market value of the property at the time of loss unless the policy defines ACTUAL CASH VALUE differently. Many policies will define ACTUAL CASH VALUE as replacement cost less physical depreciation for age and wear and tear. Some losses are paid out on a replacement cost value (REPLACEMENT COST VALUE), where the insured is paid the difference between actual cash value and replacement cost value after the insured has actual sums necessary to complete the replacement. You may collect the ACTUAL CASH VALUE loss immediately and advise the insurer you intend to make claim for the difference between ACTUAL CASH VALUE and REPLACEMENT COST VALUE when the structure is rebuilt. If your policy has a time-limit for rebuilding be sure to get a written extension of time since, after a catastrophe, the rebuilding process is often severely delayed.

When fire and water-damage reconstruction contractors write estimates for insurance companies they always add at the end of their estimate a sum equal to 10% of the basic contract price for “overhead,” and an additional 10% of the basic contract price for “profit.” This technique is a fiction believed only by contractors and adjusters. Knowledgeable construction people know that no contractor could survive on 10% profit and that contractors build overhead and profit into their basic unit costs (paint, plaster, roofing, etc) and add the “profit and overhead” numbers as a fee for the extra service they provide to insurers. In recent years, some insurers have attempted to withhold 20%, an amount equal to the contractor’s “profit and overhead” numbers to arrive at an ACTUAL CASH VALUE amount. There is no basis in the policy that allows withholding profit and overhead as a means of calculating ACTUAL CASH VALUE. In fact, ACTUAL CASH VALUE is defined either as the difference in the fair market value of the property before the loss and the fair market value of the property after the loss or the full cost of replacement using like kind and quality, less physical depreciation. You should insist that any amounts withheld from payment pending completion of the work, be documented in writing and justified by the adjuster objectively. Policyholder attorneys and some insurance regulators have successfully prevented insurers from withholding these amounts.

Investigate Contractors

Thoroughly investigate the qualifications, license, and references of your insurance company’s approved contractor before agreeing to hire them to perform the repairs. The State Contractors Licensing Board will usually provide the consumer, by telephone or over the Internet, with the contractor’s license status and history of discipline. At a minimum, the licensing entity and a reference should be checked before a contract is signed. You do not have to use consultants or contractors recommended or approved by the insurer to perform repairs. Approved contractors are typically contractors who have agreed to discount their labor and costs and follow insurer guidelines in exchange for a volume of business from the insurance company. If your insurer promises to guarantee the approved contractor’s work, the guarantee is generally limited to replacing any defective materials or correcting faulty workmanship. The insurer is not insuring against any contractor delays, negligence, or liability. Accordingly, do not use the approved contractor unless it is a contractor that you would independently hire to do the work after a thorough screening. Check that each contractor’s license is valid and for any complaints against the license. Ensure that the contractor is bonded and insured.

Seek Proper Legal Advice

Never sign a release, waiver, indemnity, or “hold harmless” agreement without proper legal advice. If the insurer, adjuster, consultant, or contractor asks you to sign a release, waiver, indemnity, or hold harmless agreement, ask them to explain why in writing. These kinds of agreements can be used to deprive an insured of rights and benefits and may obligate you to pay thousands of extra dollars for issues that arise. Consult a policyholder attorney to determine your rights before signing any such agreement.

Seek professional help, if needed. If you reach an impasse with the insurer, document the dispute fully in writing. Explain your position and why the insurance company’s position is unreasonable. If the dispute does not require legal advice, you may be able to resolve it by calling the California Department of Insurance at 1-800-387-HELP or by hiring a lawyer or public adjuster. If the dispute does require legal advice, contact a lawyer who is experienced and specializes in representing policyholders. There are many consultants who claim to be “insurance claims experts” who do not have adequate training, skill, or experience. Before you retain one investigate the person diligently by contacting licensing bodies and references.

Be Aware of Deadlines

Make sure you know all the deadlines that may cut off the right to file a lawsuit. California has a four-year statute of limitations for breaches of written contracts but most insurance policies require suit within one or two years of the loss or the denial of a claim. If your claim is denied seek legal advice promptly.

In most states the insurance company is required to tell you, in writing, that the claim is denied, and that the limitations clock is running. That is, if you disagree with the insurer’s conclusion to deny your claim you have a limited time to file suit. Make sure you understand all possible deadlines. Consult with a policyholder attorney as soon as possible. The time limitation can be as short as one year from the date the loss occurred and can be put on hold by actions of the insurer. If you wish to sue, it is best to contact counsel as soon as possible before the expiration of the time limit.

Report all Unfair Claims Handling to the Department of Insurance or an Insurance Regulator

The state Insurance Department tracks policyholder complaints about their insurers and compiles the results. Most states have proactive consumer advocates in their insurance departments who will jump in to help you if they believe the insurer is not treating you fairly.

Conclusion

Many insurers involved in Catastrophes provide their adjusters with policy limits authority and instruct the adjuster to be generous. If your house was one of those totally destroyed and coverage is available there is a good probability that you will receive the full policy limits immediately.

If you did not carry sufficient insurance to totally rebuild your house and replace your contents consider the acquisition of a factory built home which can be trucked to your site and completed, with all appliances included, for much less than a conventionally constructed home.

Almost all claims will be handled promptly and fairly. A person knowledgeable about insurance claims can better deal with an insurance company. Don’t take advantage of your insurer and don’t let an insurer take advantage of you. You are entitled to indemnity. You and your insurer should work together to make you whole.

[Adapted from Barry Zalma’s book, "Insurance Claims: A Comprehensive Guide" and his book "Mold: A Comprehensive Claims Guide" published by Specialty Technical Publishers, Vancouver, BC, Canada; 800-251-0381; http://www.stpub.com.]

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Fraud Continues With Vigor

Fraud Continues With Vigor

Continuing with the twenty first issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the September 1, 2012 issue about the end of the story of  two senior citizens dubbed the “black widows” who collected more than $2 million by murdering homeless people after purchasing life insurance claiming to be relatives. The black widows’ appeal failed and they will remain in prison for the rest of their lives.

ZIFL also reports on the fact that the state of Virginia now requires public adjusters to be licensed and to prove they have attended continuing education classes; that California has funded the Ventura County anti-fraud efforts from special taxes paid by insurers; and the last chapter of  “Candy & Abel” a serialized story about insurance fraud.

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

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

The last 10 of 555 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

Zalma on Insurance

•        Notice-Prejudice Rule Applied to Proof Of Loss Condition
•        Failing to Predict A Tort Judgment Is not Bad Faith
•        Just for Fun
•        Targeted Tender Binds Insurer
•        Divorced Spouse Collects Life Benefits
•        REGULAR USE EXCLUSION EFFECTIVE
•        Insurers and Reinsurers Must Read Their Agreements
•        Anger Resolves Nothing
•        Employee Dishonesty Covered
•        Defective Construction Not an “Occurrence”

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

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

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

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

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

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Failure to Defend Deprives Coinsurer of Right to Question Costs of Defense

Equitable Contribution Required

St. Paul Mercury Insurance Company (St. Paul Mercury), the general liability insurer for the general contractor, sought equitable contribution from Mountain West Farm Bureau Mutual Insurance Company (Mountain West), the insurer for the framing subcontractor, based on an additional insured endorsement in Mountain West’s policy naming the general contractor. The trial court ruled in favor of St. Paul Mercury and ordered Mountain West to contribute $2,087,171.50, plus interest in the amount of $372,731.73, to the defense and settlement costs St. Paul Mercury incurred in the underlying construction defect litigation. In St. Paul Mercury Insurance Company v. Mountain West Farm Bureau Mutual Insurance Company, No. B229345 (Cal.App. Dist.2 10/25/2012) Mountain West’s appealed claiming its participation in the defense of its additional insured by paying into the settlement of the underlying construction defect action on behalf of its named insured (the framing subcontractor) allows it to avoid contribution.

However, Mountain West admitted it owed a duty to defend its additional insured (the general contractor) but did not provide a defense.

St. Paul Mercury had the burden to prove the potential for coverage under Mountain West’s policies; Mountain West had the burden to prove the absence of actual coverage as an affirmative defense, and forfeited its right to challenge the reasonableness of the defense costs and the amounts paid in settlement.

FACTUAL BACKGROUND

Four Seasons Jackson Hole (FSJH) commenced a project to build a Four Seasons resort hotel in Teton Village, near Jackson Hole, Wyoming that included 17 high-end condominium units referred to as Area 6. Jacobsen Construction Company, Inc. (Jacobsen), was the general contractor on the project. St. Paul Mercury insured Jacobsen in a series of a general liability policies through April 1, 2004.

Teton Builders, Inc. (Teton), the framing contractor, contracted to build all of the structural wood framing for the four-story Area 6 condominium units only. Teton did not work on the main hotel structure. Mountain West insured Teton in two commercial general liability policies, one effective October 1, 2001 through October 1, 2002, and the other from October 2002 through October 1, 2003. Mountain West and Teton made Jacobsen an additional insured under Teton’s policies on June 12, 2002 and removed Jacobsen from the policies on March 17, 2003.

FSJH terminated Jacobsen from the project in February 2004. Jacobsen sued FSJH alleging breach of contract and nonpayment. FSJH cross-complained against Jacobsen seeking damages for construction defects for, inter alia, “[i]nstallation of defective and non-conforming work,” “defective and incomplete installation of exterior wood finishes,” “out of plumb, out of square and/or out of level interior walls,” and defective weatherproofing and roof edges. In its amended cross-complaint dated March 23, 2006, FSJH alleged “defective and deficient installation of framing, drywall, millwork, and paint at Area 6″ among other problems (the underlying construction defect action).

Mountain West refused to accept St. Paul Mercury’s tender and rejected numerous attempts by St. Paul Mercury’s attorneys to share evidence showing the damage alleged by FSJH that arose out of Teton’s framing work. The underlying construction defect action was eventually resolved by a settlement.

The threshold question of Mountain West’s duty to defend Jacobsen in the underlying construction defect action was resolved by motion. Mountain West did not dispute it “never defended Jacobsen against FS Jackson Hole’s cross-complaint.” In granting summary adjudication, the trial court ruled Mountain West’s duty to defend Jacobsen “was triggered by the allegations of framing deficiencies.”

DISCUSSION

Normally, in an action by an insurer to obtain contribution from a coinsurer, the inquiry is whether the nonparticipating coinsurer had a legal obligation to provide a defense or indemnity coverage for the claim or action prior to the date of settlement, and the burden is on the party claiming coverage, St. Paul Mercury here, to show that a coverage obligation arose or existed under the coinsurer’s policy.

However, the burdens and proof are altered somewhat when one insurer with a defense duty does not join in the defense of the underlying action. 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. The settling insurer does not have to prove actual coverage. 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 trial court found that Jacobsen tendered the defense to Mountain West and that the insurer acknowledged Jacobsen was an additional insured under its policies covering Teton. The court also found that Mountain West acknowledged it had a duty to defend Jacobsen against FSJH’s claims in the underlying construction defect action but did not assign defense counsel to defend Jacobsen or pay any costs incurred in the defense of Jacobsen in the underlying action.

By virtue of its policies’ additional insured endorsement naming Jacobsen, Mountain West had an obligation to provide a defense to Jacobsen. Mountain West’s policies expressly included a duty to defend. It is settled that where an insurer has a duty to defend, the obligation generally applies to the entire action, even though the suit involves both covered and uncovered claims, or a single claim only partially covered by the policy.

The trial court found that the property damage arising out of Teton’s work “began occurring promptly as other trades followed [Teton's] framing work” was of a continuous, progressive nature. Mountain West clearly and admittedly had a duty to defend Jacobsen because Mountain West actually covered the risk. Equitable contribution is usually allowed for the amount paid in settlement of the third party claim plus defense costs incurred by the insurer who defended the action.

As a coinsurer who declined to provide a defense, Mountain West was precluded from challenging the reasonableness of the defense costs or the amount in settlement. The parties stipulated that St. Paul Mercury paid $1,783,887.20 to defend Jacobsen and that a total of $3,070,000 was paid to settle the case.

Mountain West was required to pay 43 percent of the total defense costs is equitable. Mountain West argued that where there were 18 subcontractors on the entire project and allegations of defects unrelated to Teton’s work, it should not be required to pay 43 percent of the defense costs. But, only St. Paul Mercury and Mountain West had a duty to defend Jacobsen and St. Paul Mercury demonstrated what portion of the claims against Jacobsen arose out of Teton’s work. The appellate court concluded that the trial court’s allocation of defense costs did not exceed the bounds of reason.

The trial court here chose the time on the risk method to apportion responsibility, which apportionment is based upon the relative duration of each primary policy as compared with the overall period during which the ‘occurrences’ ‘occurred.’  In so ruling, the court noted that this approach was the most equitable and the most favored method of apportionment. The court reasoned that both insurers’ policies afforded coverage for property damage during their policy periods and that there was continuing and progressive property damage claimed against Jacobsen by FSJH that arose out of Teton’s work and that occurred during Mountain West’s policy period.

Mountain West’s policies were in effect during the period of Tetons’ work, or about nine months, whereas St. Paul Mercury’s policy was in effect for 12 months. As there were only two insurers with a duty to defend Jacobsen and who provided coverage for property damage during their policy periods, the trial court properly apportioned its share by the time on the risk method which was not  challenged.

ZALMA OPINION

An additional insured endorsement gives the additional insured who qualifies for the coverage all of the rights provided to the named insured. Defending the named insured and ignoring the additional insured is a scheme fraught with peril. By doing so the insurer of the additional insured loses its right to control or question the amounts spent in defense and/or settlement of the suit. This can be exceedingly expensive and accomplishes nothing if the additional insured or its primary insurer decides to seek contribution.

This case makes it clear that when an additional insured fails to provide a defense that it is incumbent on the person or entity designated as additional insured and its primary insurer should never allow the insurer of the additional insured to avoid its obligation and should seek contribution.

 

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

 

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Notice-Prejudice Rule Applied to Proof Of Loss Condition

California Court of Appeal Ignores Prior Supreme Court Decision

Courts try to do justice and modify statutes and earlier precedent to provide a remedy to people otherwise not entitled to receive it by ignoring the fact that there is no power in the court to dispense with a condition, or excuse the nonperformance of it. The case discussed below seems to have ignored its obligation to follow Supreme Court precedent and took on itself the power to rewrite a contract of insurance to give plaintiffs the right to sue their insurers even though the insureds failed to fulfill a mandatory condition precedent to indemnity and the right to sue.

The state of California mandates a statutory fire insurance policy requiring, among other things, that an insured submit a sworn statement in proof of loss within 60 days of the loss. Modern policies are permissibly more favorable to the insured by only requiring submission of a sworn proof of loss within 60 days of a demand.

Failure to submit the proof of loss is a breach of a material condition precedent to the benefits of the policy. One hundred twelve years ago the California Supreme Court ruled in White v. Home Mutual Ins. Co., 128 Cal. 131, 60 P. 666 (1900) that, unless waived, failure to file the proof within the time limited by the policy is fatal to an action upon it.

The Supreme Court in White stated:

“The contract is that the action cannot be brought until after a full compliance by the insured with all the forgoing requirements. One of these requirements demanded the insured to furnish proofs of loss within 60 days from the date of the fire. At the time this complaint was filed the insured had not complied with this requirement of the contract and the 60 days had long since gone by.”

The trial court in White allowed the insured recovery because the insurer had presented the proofs necessary within “a reasonable time.” The Supreme Court reversed because the condition was clear and unambiguous and because White clearly breached a material condition precedent. That case has not been reversed or modified.

Regardless, the Court of Appeal, without a mention of White v. Home Mutual, decided that the so-called notice prejudice rule requires the court to ignore the Supreme Court’s clear and unambiguous ruling and require that failure of providing a timely proof of loss sixty days after it is requested must substantially prejudice the insurer before the condition will be enforced in Ocie E. Henderson et al v. Farmers Group, Inc., et al, No. B236259 (Cal.App. Dist.2 10/24/2012)

FACTUAL SUMMARY

Ocie E. Henderson, Anthony Wallace, Roscoe and Edna M. Allen, and John and Sharon Billingslea (Plaintiffs) appealed from judgments entered after the court granted motions for summary adjudication in favor of Fire Insurance Exchange (FIE), which disposed of all appellants’ causes of action. Besides FIE, Plaintiffs sued Farmers Group, Inc. (Farmers Group); Farmers Insurance Exchange; Fire Underwriters Association (FUA); Mid-Century Insurance Company; Truck Insurance Exchange; and Truck Underwriters Association alleging that these entities collectively denied or underpaid valid claims for property damage sustained in the 2009 Southern California wildfires (Station Fire). Plaintiffs brought causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing (bad faith), and unfair business practices under the Business and Professions Code.

FIE moved for summary adjudication of breach of contract and bad faith claims by Henderson, Wallace and the Allens on the grounds that their failure to submit sworn proofs of loss, as required under their respective insurance policies, constituted a complete defense to these claims. The court granted the motions on this ground. Because Henderson and the Allens dismissed their claims for unfair business practices, the court entered a judgment. On appeal, they contend that the summary adjudication against them was erroneous because FIE cannot rely on the failure to submit a proof of loss as a defense absent a showing of substantial prejudice.

In August 2009, the Station Fire destroyed 250 square miles of forest and 89 homes in Southern California. Plaintiffs owned homes located near the fire line. While none of their homes was burned by the fire, they claimed their homes sustained damage from smoke, soot, and ash from the fire, requiring remediation.

The policies required Plaintiffs to provide a signed, sworn proof-of-loss notice within 60 days of a request by FIE. The policies, like the policy in White v. Home Mutual, provide that the insured cannot bring an action against FIE unless he or she has fully complied with all policy terms and conditions.

DISCUSSION

The primary issue in these cases is whether, in order to sustain a defense based upon the failure of Henderson, Wallace, and the Allens to submit a sworn proof of loss, FIE must show substantial prejudice.

Although the notice-prejudice rule in the past was limited to the “notice” condition of the policy the Court of Appeal in this case added to the rule that it also requires the insurer to prove prejudice before enforcing the condition that required the insured to submit a sworn statement in proof of loss within 60 days of request.

Noting that the purpose of the proof of loss requirement is to give the insurer the necessary facts to facilitate its investigation of a claim of loss after it has received notice of the claim and that the proof of loss helps the insurer identify fraudulent claims it still concluded that it is unenforceable if the delay did not prejudice the insurer. In so doing it adopted the reasoning of the trial court in White that was reversed by the Supreme Court.

FIE’s employees testified that they waited for the insured to submit a proof of loss only where FIE’s hygienist recommended cleaning, i.e., when its investigation determined the insured had sustained a specific measure of damage and cleanup costs would be greater than the deductible. The Court of Appeal reasoned that a reasonable trier of fact might infer that the insureds’ failure to provide a sworn proof of loss in such cases was a technical forfeiture that FIE used to avoid paying for cleanup costs when its hygienists recommended that course of action after testing samples from the property. The Court of Appeal, by so doing, ignored the fact that the Legislature, and the California Supreme Court, made it a mandatory condition precedent to receipt of indemnity.

The Court of Appeal concluded that the notice-prejudice rule applies to this case. In order to enforce a defense based upon plaintiffs’ failure to provide a timely proof of loss and that FIE, and all first party insurers, must show that it suffered substantial prejudice as a result of the breach of condition.

ZALMA OPINION

The Legislature of the state of California, like the legislatures of almost every other state, enacted a standard fire insurance policy that compels submission of a sworn statement in proof of loss within 60 days of a fire or any extension of time provided by the insurer.

In this case FIE gave extra time to the Plaintiffs and only required a sworn proof of loss within 60 days of its request. The Plaintiffs failed to provide that proof of loss and California Supreme Court precedent, even though hoary with age, should be followed and the breach of the proof of loss condition must be treated as an common condition precedent. Failure to comply deprives the insured of the right to sue.

As the Supreme Court stated in White:

“Time, too, is the essence of the contract in conditions of this kind, and there is now power in the court to dispense with a condition, or excuse the nonperformance of it.”

The Court of Appeal in this case dispensed with a material condition and appears to have exceeded its power and ignored the precedent set by the Supreme Court. It has, without the agreement of the parties and the Legislature rewritten the policy. Hopefully, if the California Supreme Court is asked to review, will support its precedent from 1900.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Failing to Predict A Tort Judgment Is not Bad Faith

The Defense Wins

In The Insurance Company of the State of Pennsylvania v. Old Republic General Insurance Corporation, Inc., United States District Court, Central District of California, Case No. 2:11-ev-05856-JHN-FFMx the Insurance Company of the State of Pennsylvania (ISOP) sued Old Republic General Insurance Corporation, Inc. (ORIC) for bad faith failure to settle with a plaintiff within its policy limits only to have an excess verdict at trial.

David Garthe of Boornazian, Jensen & Garthe represented ORIC in trial and retained me as his expert to testify about the custom and practice of primary and excess insurers. I was able to testify that in my professional and expert opinion, ORIC acted reasonably and appropriately followed the custom and practice of CAI in California by:

  1. That ORIC, evaluated the claim of the plaintiff in the underlying case after conducting a thorough investigation of the claim;
  2. Retained competent, a.v. rated counsel to defend the insured;
  3. Authorized counsel to retain experts requested by them to defend the insured;
  4. Authorized and paid for a sub rosa investigation of the plaintiff that obtained video tape of the plaintiff that showed his injuries were not as stated;
  5. Authorizing the retention of competent expert witnesses to testify at trial;  paid the fees of counsel and all expenses of trial; and
  6. After judgment paid its $1 million limit of liability.

ORIC and counsel retained to defend the insured, in the custom and practice of CAI in California, advised the insured and ISOP of the evaluation of counsel, the independent evaluation of ORIC and counsel, and their evaluation of proposed settlement offers made by the Plaintiff.

ORIC’s conduct, in the custom and practice of the industry, was reasonable, prudent and in good faith.

The jury deliberated for 7 1/2 hours and rendered a defense verdict.

Primary insurers owe a duty to insureds — and their excess insurers — to settle a case when liability is reasonably clear. Primary insurers also owe a duty to insureds — and their excess insurers — to defend through trial a case where it reasonably believed that its insured was not liable in amounts approaching its policy limits. That the jury disagreed is not evidence that the primary insurer acted in bad faith. It is, as the jury found, nothing more than a failure to accurately predict the jury verdict. In this case the defense counsel advised that in their opinion there was approximately a 20% chance the plaintiff would obtain a verdict in his favor and if the jury could find damages in excess of the limits of the primary policy. The jury fell in that 20% in the tort case and the jury in the case by ISOP against ORIC found that there was no breach of duty or bad faith in taking the injury case to trial.

To prove bad faith more is required than a failure to accurately predict a jury verdict.

Mr. Garthe must be commended for presenting a thorough and well reasoned defense.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Just for Fun

Chapter 15 from “Heads I Win, Tails You Lose”

The story that follows is based on fact. It is, however, a work of fiction. The names, places and descriptions have been changed to protect the guilty. Any resemblance to real people is purely coincidental. 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. It is part of my e-book and claims training course available from A.D. Banker. I have to testify today so I don’t have the time to do my regular post.

Who’s Cheating Whom?

Some people are too smart for their own good. They want to commit a fraud but don’t know how. In so doing they hurt themselves rather than help.

When I was a young insurance adjuster, forty years ago, the company, I worked for insured a homeowner who owned a Capuchin monkey as a pet. The monkey was a friendly sort. He did not like confinement to the house. He wanted to be out and about meeting and greeting the world.

One day, when the insured was not looking, the monkey escaped. He was a pet and did not want to run away. He just wanted out of the house. His escape, therefore, led him to the roof of the next door neighbor’s house.

The next-door-neighbor had a tile roof. The monkey’s sharp little toenails made an infuriating clicking noise as he ran back and forth on the tiles. The neighbor, unable to stand the noise, came out of the house and saw her neighbor’s monkey on her roof. The insured was not home. The noise was unbearable. Not only did he scratch his nails on her roof but he chattered incessantly. She yelled at him without success. She picked up stones from her yard and began throwing them at the monkey.

The claimant did not know how aggressive little wild animals can be even if they are raised as pets. The monkey took offense when hit by a stone. He jumped to her shoulder sinking his claws through her thin cotton shirt and taking a bite out of her neck. He was tiny so, unlike a chimpanzee, could not cause serious damage, but his bite did break the skin.

The insured returned home at about the same time, patiently removed the monkey from her neighbor’s neck and applied first aid. The insured reported the incident to her insurance company and I was assigned to adjust the claim. I met the neighbor who informed me that she was a good woman. She said she did not wish to take advantage of her neighbor. She had gone to her doctor who applied antibiotic cream and a bandage. The doctor told her to clean the wound out daily with hydrogen peroxide and place a new dressing on the wound for a week. She wanted only to be paid her doctor’s $100 office visit charge $5.00 for the bottle of peroxide and $1.00 for the bandages.

Since liability with injuries caused by a wild animal are always clear I readily accepted her offer of settlement. The claimant did not ask for any recovery for her pain and suffering. She did not ask to be paid for the trouble and inconvenience she went through to have her wound bandaged.

I thought I had an excellent settlement. I told the claimant I would send her a check and asked, only, that she allow me to complete my file by sending me the doctor’s bill and the receipts for the peroxide and bandages.

The $106 dollar check, with the release printed on the back, went in the mail that day. It was negotiated by the claimant immediately. The receipts and billing from the doctor appeared the next day in my office.

Normally they just would have been filed without a glance, the file closed and put away. This time, I was waiting for a telephone call from a private lawyer to settle a $100,000 case and had time on my hands. I looked at the doctor’s bill she sent me and found that it was an original carbon. The doctor kept the original bill and gave the claimant a carbon copy. On the carbon for the office visit charge were the numbers one and zero in blue followed by an additional zero in black ballpoint.
The claimant, who for an injury of her type, could have easily talked me into paying her $1,000 to $3,000 back in 1972 thought she had cheated me by changing a $10.00 doctor bill to $100.00 bill. In so doing she gained $90.00 and lost $3,000 or more.
Her fraud was a success. We did nothing. We reported the fraud to no one. The insured owed the claimant much more than the $106.00 we paid her. The claimant probably thought she committed a brilliant fraud. This time the person actually damaged by the fraud was the claimant, not the insurance company.

Adjusters must always keep in mind that when they receive an offer to settle a claim for an amount that seems too good to be true there is a very high probability that it is, in fact, too good to be true.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Targeted Tender Binds Insurer

More than One Insurer

Insured Chooses Who Defends

Insurance companies are not popular or well liked by the public. Triers of fact will, on occasion, allow their dislike of insurers to color their decision. When insurers sue each other, however, the dislike is applied equally and the letter of the law is usually applied. Illinois allows for targeted tender of the obligation to defend and indemnify when more than one insurer’s coverage applies to a particular loss.

The Illinois Court of Appeal was called upon to resolve the dispute between two sets of insurers, one that was targeted by an additional insured and one that had to step in after the first refused to defend all of the additional insureds. The Defendants appealed from the trial court’s orders and the Plaintiffs cross-appealed with neither side being pleased with the trial court’s decision.

Background

This appeal concerning the extent of the respective parties’ insurance coverage stems from the underlying lawsuit filed after the deceased, Marian Gal, died due to an elevator malfunction at a building located at 200 North Dearborn Parkway in Chicago. The accident occurred on July 19, 2001. The fifth amended complaint alleged that on the day of the accident, Gal was at the building performing janitorial services. Despite previous malfunctions with one of the elevators, Gal was given an access key to the elevator by an Aargus security guard. When the elevator doors opened, the elevator was not at the same floor as Gal, and he plummeted down the elevator shaft to his death. The suit was ultimately settled in November 2006.

The Agreement and Insurance Policies

In 1995, Aargus Security contracted with 200 North Dearborn in a continuing services agreement (Agreement) to provide certain services with respect to the property located at 200 North Dearborn Parkway in Chicago. The Agreement provided that Aargus would name Baird & Warner, Inc., and the “[o]wner” as “additional insureds.” “Owner” was defined as “200 North Dearborn Partnership.”

United National issued a commercial general liability policy to Aargus, which covered the relevant time period when Gal’s accident occurred. The “additional insured” endorsement did not specifically name who was an additional insured; rather, it stated “blanket where required by contract.”

The “additional insured” endorsement contained two limitations. First, the insurance would not apply to an additional insured’s own acts or omissions. Second, if liability was to be imposed on the additional insured because of its acts or omissions and those of the named insured, the insurance would serve as “coinsurance with any other insurance available to the additional insured, in proportion to the limits of liability of all involved policies.”

The policy also contained an employer’s liability exclusion, which excluded coverage for bodily injury to an employee of the insured arising out of and in the course of employment by the insured. Further, the policy had a $1 million per-occurrence limit. United National initially denied coverage to 200 North Dearborn and Baird & Warner; however, United National later provided a defense under a reservation of rights.

200 North Dearborn was also insured by Hartford Casualty Insurance Company. Hartford issued a commercial general liability insurance policy to 200 North Dearborn, which covered the relevant time period when Gal’s accident occurred. The policy had a $1 million per-occurrence limit. Hartford undertook 200 North Dearborn’s defense in the underlying lawsuit.

Declaratory Judgment Action

United National filed a declaratory judgment action on August 18, 2006. United National acknowledged that it was defending its named insured Aargus in the underlying lawsuit. United National further acknowledged that it had agreed under a reservation of rights to defend 200 North Dearborn and Baird & Warner pursuant to the “additional insured” endorsement in its policy with Aargus. However, United National contended that it had no duty to defend or indemnify as additional insured defendants Kenilworth, Inc., Warner Investment Company, Inc., and Elzie Higgenbottom, whom it referred to collectively as the “non-identified defendants” who were partners of 200 North Dearborn. According to the declaratory judgment complaint, the “non-identified defendants” were added as defendants in the third amended complaint in the underlying cause in 2003. Both sides filed motions for summary judgment.

The court ruled on the motions in a written order on August 4, 2009. The court denied United National’s motion and granted Hartford’s motion in part. The court determined that United National had a duty to defend the “non-identified defendants” under the “additional insured” endorsement since they were partners of 200 North Dearborn. The court also determined that defendants had targeted tender to United National rather than to Hartford and United National was required to reimburse Hartford for all sums paid in defense and settlement of the underlying lawsuit.

United National filed a motion for reconsideration or clarification of the court’s order. The court ruled on the motion in a written order on January 27, 2010. The court ordered:

  1. United National was not estopped from asserting defenses to the duty to indemnify defendants;
  2. defendants 200 North Dearborn and Baird & Warner were not entitled to indemnification from United National since the policy issued by United National excluded coverage for bodily injuries to an employee of the insured and the deceased was the insured’s employee;
  3. any remaining duty of United National to reimburse Hartford was limited to the remaining limits of United National’s policy; and
  4. there was no just reason to delay enforcement or appeal of the order.

 

Appeal

Summary judgment is appropriate where the pleadings, depositions, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. The interpretation of an insurance policy and the coverage provided are questions of law that are appropriate for resolution through summary judgment.

To resolve the dispute the Court of Appeal first considered the trial court’s determination that United National was not estopped from contesting coverage and found that United National was not estopped from contesting coverage because United National defended 200 North Dearborn and Baird & Warner under a reservation of rights and also filed a declaratory judgment action, which sought, among other relief, a determination of its rights to defend the “non-identified defendants.”

It reasoned that the fifth amended complaint in the underlying lawsuit was filed in June 2006, and United National’s complaint for declaratory judgment was filed in August 2006. The Court of Appeal concluded that United National’s declaratory judgment suit was filed within a reasonable amount of time so as to preclude estoppel because of the long procedural history of the case. United National only learned the “non-identified defendants” were seeking coverage under United National’s “additional insured” endorsement sometime in 2005 or 2006 and its filing of the declaratory judgment suit in August 2006 was not so delayed or unreasonable. Although the trial court ultimately determined that United National breached its duty to defend the “non-identified defendants,” estoppel does not apply because United National filed a declaratory judgment action.

As noted above, United National’s policy also contained an employer’s liability exclusion, which excluded coverage for bodily injury to an employee of the insured arising out of and in the course of employment by the insured. Notwithstanding the parties’ arguments to the trial court regarding the exclusion, the trial court did not specifically address the exclusion in its August 4, 2009, order. After United National moved to reconsider the trial court addressed the exclusion in its January 27, 2010, order, determining that the exclusion applied to preclude indemnification.

United National presented evidence to the trial court that 200 North Dearborn admitted that Gal was its employee in various documents 200 North Dearborn submitted to the trial court in the underlying lawsuit. Here, the Court of Appeal found no error in the trial court’s determination that Gal was the insured’s employee, and as such, the employee liability exclusion in the policy precluded indemnification but not the duty to defend.

Targeted Tender Required

The trial court determined that the “non-identified defendants” were additional insureds because they were partners of 200 North Dearborn, noting that a partner’s liability was coextensive with the partnership itself. Even though the identity of the additional insured was “200 North Dearborn Partnership” as owner, coverage included the partners within the partnership.

United National had a duty to defend the “non-identified defendants” under the “additional insured” endorsement. As to 200 North Dearborn and Baird & Warner, the trial court initially ordered United National to reimburse Hartford for 100% of its defense costs (later qualified by up to the limits of the policy) because defendants had targeted their tender to United National. As addressed below, based on the theory of targeted tender, United National was obligated to provide for all of defendants’ defense costs, up to the policy limits.

In Illinois when an insured is covered under more than one insurance policy, it may tender its defense solely to one insurer, and that insurer may not seek equitable contribution from another insurer whose policy is in existence but whose coverage the insured has refused to invoke. Even when there is an “other insurance” provision in the policy, if the other insurance is never triggered, then the apportionment of liability under the “other insurance” clause does not arise. The trial court determined that since 200 North Dearborn and Baird & Warner targeted their defense to United National, United National had the sole primary obligation to defend and indemnify them.

United National must reimburse Hartford for 100% of its defense costs up to United National’s policy limit. The trial court’s order was affirmed.

ZALMA OPINION

This case turned on an Illinois Supreme Court decision that allows an insured to target one insurer to pay for its defense and indemnity. It teaches that when a dispute arises between insurers over the duty to defend they should work together to resolve the dispute rather than litigate. No one won in this case except, perhaps, Mr. Gal’s heirs.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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Divorced Spouse Collects Life Benefits

Failure to Change Beneficiary Fatal

When people are divorced they want nothing more than to totally forget the ex-spouse. Usually that is a healthy thing to do for the psyche of the spouses. It is not a good thing with regard to insurance and especially to life insurance. When divorcing life insurance should be part of any settlement agreement or judgment. When ignored, at the time of the death of an insured spouse, the heirs and the ex-spouse will find themselves embroiled in unnecessary litigation.

For example, in Utah, Rhonda H. Malloy (Malloy) appealed from the district court’s Order Granting Summary Judgment dismissing her claim to the proceeds of a life insurance policy insuring her deceased husband Dan Malloy (Husband) in Rhonda H. Malloy, An Individual v. Mary Beth Malloy, 2012 UT App 294 (Utah App. 10/18/2012) who, after his divorce from Mary Beth failed to change the beneficiary designation on his life insurance policy.

FACTS

Husband married appellee Mary Beth Malloy (Defendant) in July 1989. In August 1989, Husband purchased a $50,000 Federal Employees’ Group Life Insurance (FEGLI) policy through his federal employer. At that time, Husband executed a FEGLI Life Insurance Election form (the election form), as well as a Designation of Beneficiary form (the beneficiary form) naming Defendant as the policy’s sole beneficiary. In April 2004, Husband and Defendant divorced, but Husband did not change or cancel his designation of Defendant as the beneficiary of his FEGLI policy.

In June 2006, Husband married Malloy. A little over three years later, on September 1, 2009, Husband died. Husband did not change or cancel his 1989 designation of Defendant as the policy’s beneficiary prior to his death, and FEGLI paid the $50,000 policy benefit to Defendant pursuant to the beneficiary form. Malloy sued Defendant, asserting several causes of action in an attempt to recover the insurance proceeds from Defendant.

THE ISSUE

Malloy claimed that, pursuant to Utah Code section 75-2-804, Husband’s divorce from Defendant automatically revoked his designation of Defendant as the beneficiary of the FEGLI policy.  Section 75-2-804(2) states, in relevant part, “Except as provided by the express terms of a governing instrument, … the divorce or annulment of a marriage … revokes any revocable … disposition or appointment of property made by a divorced individual to his former spouse in a governing instrument….” Utah Code Ann. § 75-2-804(2) (Supp. 2012).

In opposition to Malloy’s motion for summary judgment on this claim, Defendant provided the district court with a copy of a FEGLI insurance manual that stated, “A divorce does not invalidate a designation that names your former spouse as beneficiary. You need to complete a new [Designation of Beneficiary] to remove a former spouse.”

TRIAL COURT DECISION

The district court granted summary judgment to Defendant. In its Memorandum Decision, the district court determined that the “governing instrument” of Husband’s FEGLI policy was “the insurance policy and insurance manual, which is incorporated by reference in the election form.” The district court further determined that the insurance manual “says that divorce does not invalidate the designation of the beneficiary” and that this language is “contrary to the general rule which states that divorce does revoke the designation of beneficiary.” In light of this determination, the district court entered summary judgment in favor of Defendant.

ANALYSIS

The insurance manual is a government publication, no such supporting evidence is required to establish its authenticity. In Utah, the following items of evidence are self-authenticating; they require no extrinsic evidence of authenticity in order to be admitted: Books, pamphlets, or other publications purporting to be issued by public authority.

The district court determined that the insurance manual was “incorporated by reference” into Husband’s election form. Malloy does not challenge the district court’s determination that this language incorporated the FEGLI Handbook – the insurance manual – into Husband’s election form.

There is no dispute that Husband signed, and thereby executed, his election form in 1989, well prior to his divorce from Defendant. Accepting the district court’s determination that the insurance manual was incorporated by reference into that form, the insurance manual constitutes “a governing instrument executed by the divorced individual before the divorce or annulment of his marriage to his former spouse”. Further, the insurance manual’s provision that “divorce does not invalidate a designation that names your former spouse as beneficiary” clearly satisfies the statute’s exception for “the express terms of a governing instrument.

In light of the express terms of the insurance manual, its incorporation into Husband’s signed election form, and the “express terms” exception of the statute the appellate court concluded that  the district court properly determined that Husband and Defendant’s divorce did not revoke Husband’s designation of Defendant as the beneficiary of his FEGLI policy.

ZALMA OPINION

Divorce happens often. People who divorce should consult their life insurance policies and, unless they want the ex-wife to collect on the policy, the beneficiary designation should be changed. Similarly, all insurance policies, should be reviewed to remove the spouse as a beneficiary of first and third party policies to avoid confusion and 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

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REGULAR USE EXCLUSION EFFECTIVE

An Apple Can Never Be an Orange

Erie Insurance Exchange (“Erie”) appealed to the Superior Court of Pennsylvania from the grant of summary judgment in favor of Patrick and Daryl Rother (“Mother”) in a declaratory judgment action involving the applicability of the regularly used, non-owned vehicle exclusion in Mother’s personal vehicle policy. In Patrick Rother and Daryl Rother v. Erie Insurance Exchange, 2012 Pa.Super. 228 (Pa.Super. 10/18/2012) the appellate court resolved the issues raised by the appeal.

FACTS

Patrick Rother was severely injured in a motor vehicle accident on March 3, 2007, while he was driving his father’s vehicle. At the time of the accident, Patrick was residing with his mother, Daryl Rother. He had recently acquired a job that was located ten miles from his mother’s home and he did not own a car. His father permitted him to use one of his vehicles, a 1990 Nissan, to commute to work and for emergencies only. Patrick had been using the vehicle for those purposes for two weeks when he was involved in an accident with an intoxicated driver and was severely injured.

After recovering the liability benefits under the other driver’s policy, Patrick and Mother commenced this action seeking a declaration that Erie was obligated to provide underinsured motorist coverage under Mother’s policy. Erie maintained that the coverage was excluded by the regular use exclusion contained in the policy. The Rothers filed a motion for summary judgment, which the trial court granted finding the regular use exclusion inapplicable on the facts of the case.

It is undisputed that Patrick was driving his father’s 1990 Nissan, a vehicle not owned by Mother and not insured for UM or UIM coverage under her Erie policy, and that Patrick was a resident of Mother’s household at the time of the accident. His father permitted him to use his car to commute to work and for emergencies. On five of the days Patrick operated the Nissan he retrieved the car at his father’s home in the morning and returned it after work. On two occasions he drove the Nissan to the home he shared with his mother. On one of the latter occasions, he received a call late in the evening from a friend who required a ride, and it was while Patrick was proceeding to retrieve his friend that the accident occurred. Patrick viewed this as an emergency.

QUESTION PRESENTED

Did the trial court err in determining that the regularly used, non-owned vehicle exclusion in a personal auto policy was not applicable to the claims of the plaintiff, Patrick Rother, for recovery of underinsured motorist benefits where his injuries arise out of the operation of a vehicle: (1) not owned by him or any resident relatives; and (2) used regularly by him to travel back and forth to work?

In evaluating the trial court’s decision to enter summary judgment, the appellate court must focus its analysis on the legal standard articulated in the summary judgment rule. Whether a claim for insurance benefits is covered by a policy is a matter of law which may be decided on a summary judgment motion. The appellate court may only disturb the entry of summary judgment only where it is established that the court committed an error of law or abuse of discretion.

The policy provision at issue provides:

        What We Do Not Cover – Exclusions This insurance does not apply to:
        
        10. bodily injury to you or a resident using a non-owned motor vehicle or a non-owned miscellaneous vehicle which is regularly used by you or a resident but not insured for Uninsured or Underinsured Motorist Coverage under this policy.

The only issue is whether, on the undisputed facts presented to the court, Patrick regularly used the 1990 vehicle.

In Pennsylvania, the test for “regular use” is whether the use is “regular” or “habitual.”  Erie contends that the trial court erred in refusing to apply the regular use exception on the facts herein. Patrick’s use of his father’s vehicle to go to and from work constituted regular use of the vehicle and the fact that his use was of short duration prior to the accident was irrelevant.

Patrick counters that the facts herein establish that his use of his father’s 1990 Nissan was “incidental, infrequent and irregular” and “significantly restricted” by his father.  When presented with the Rothers’ motion for summary judgment, as well as the parties’ stipulation of facts and opposing and supporting submissions, the trial court granted the motion, and held as a matter of law that Patrick’s use of the vehicle did not preclude coverage under the exclusion.

The Nissan was supplied by Patrick’s father for the specific purpose of transportation to work and the appellate court found that such use was regular in the context of a personal vehicle. Furthermore, restrictions on Patrick’s use of his vehicle and regular use of that vehicle are not mutually exclusive. Patrick routinely and habitually used the vehicle within the scope of his father’s permission to go to and from work four days per week. The appellate court found this type of restriction on use to be comparable to the situation involving fleet or employer-owned vehicles where use is limited to work-related activities, and despite restrictions on use, it found the use to be regular within the meaning of the exclusion.

While Patrick had only used the vehicle for two weeks for this purpose, there was no indication that the use was temporary. The 1990 Nissan was the only vehicle Patrick used, it was used for a particular purpose, the pattern of use was consistent, and Patrick’s use and possession of the vehicle was exclusive for a significant time each workday. Patrick’s use could not be the type of isolated, casual, or incidental use of a non-owned vehicle that courts have held not to constitute regular use.

The regular use exclusion has been upheld on policy grounds because it generally promotes the cost containment policy underlying the state motor vehicle statutes. In an automobile insurance policy, it functions to prevent an insurance company from being subjected to an additional risk of coverage for a vehicle for which the insurance company did not receive a premium or intend to insure. As a matter of law the appellate court held that the regular use exclusion applies on the facts to preclude coverage. Therefore, the order granting summary judgment was reversed and the case remand to the trial court for entry of summary judgment in favor of Erie.

ZALMA OPINION

It is refreshing to find a court that reads a policy clearly as it is written rather than stretch the language of a policy to provide benefits to a person severely injured.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Insurers and Reinsurers Must Read Their Agreements

No Relief From Terms of Contract

The Connecticut Court of Appeal was asked to resolve a dispute between an insurance holding company and a reinsurer in Trenwick America Reinsurance Corporation v. W. R. Berkley, No. (AC 33388) (Conn.App. 10/23/2012). The defendant W. R. Berkley Corporation appealed from the judgment of the trial court, rendered in favor of the plaintiff, Trenwick America Reinsurance Corporation. On appeal, Berkley claimed that the court improperly (1) concluded that there was no mutual mistake and (2) found that the commutation agreement was not ambiguous.

FACTS

Trenwick is a reinsurance company with its principal place of business in Fairfield, Connecticut. Berkley is an insurance holding company with its principal place of business in Greenwich, Connecticut. At various times prior to September 3, 2004, Trenwick entered into reinsurance agreements with the defendant and its subsidiary insurance companies. The reinsurance agreement obligated Trenwick to reinsure certain liabilities of Berkley’s insurance companies. More specifically, in exchange for premiums paid by the Berkley Trenwick agreed to pay a stated percentage of the defendant’s insurance companies’ losses, claims, and other expenses.

Trenwick and Signet Star Reinsurance Company (Signet Star), a reinsurance company that is a subsidiary of Berkley entered into an agreement on June 10, 1999, referred to as Special Casualty and Accident Reinsurance Facility (SCARF II). The trial court noted that SCARF II obligated Trenwick “to accept a ten percent part of sixty percent of Signet Star’s overall losses under the program in exchange for a corresponding quota share (ten percent) of the premiums that Signet Star collected.” As part of SCARF II, the plaintiff also “agreed to accept a 20 [percent] participation of the employer’s liability [for the workers' compensation claims] part of the program.”

On or about September 3, 2004, Trenwick and Berkley entered into a commutation and release agreement (commutation agreement). By its terms, the commutation agreement referred to Trenwick as the “Reinsurer” and Berkley, its subsidiaries and affiliates collectively were referred to as the “Company.” The commutation agreement’s stated purpose was to “fully and finally terminate, release, determine and fully and finally settle, commute and extinguish all [the parties'] respective past, present, and future obligations and liabilities, known and unknown, fixed and contingent, under, arising out of, and/or pursuant to the [r]einsurance [a]greements…”

The commutation agreement defined “reinsurance agreement” in the following paragraph: “Whereas, the [p]arties have entered various reinsurance agreements pursuant to which the Reinsurer reinsured certain liabilities of the Company and/or the Company reinsured certain liabilities of the Reinsurer (such agreements and all other agreements entered into in connection or relating to such agreements are referred to herein collectively as the [r]einsurance [a]greements) . . . .” The commutation agreement required Trenwick to make a payment of $15,248,338 to Berkley “in full satisfaction of the Reinsurer’s past, present and future net liability under the [r]einsurance [a]greements . . . .”

The commutation agreement provided that each party “represents to the other as follows: (a) it has had full opportunity to consult with its respective attorneys in connection with the negotiation and drafting of this [a]greement; (b) it has carefully read and understands the scope and effect of each provision contained in this [a]greement; (c) it has conducted all necessary due diligence, investigation and analysis of the transactions contemplated by this [a]greement; and (d) it is not relying upon any representations made by any other party, its attorneys or other representatives.”

Following the execution of the commutation agreement, from September 3, 2004 until approximately June, 2008, the Trenwick continued to make payments pursuant to SCARF II. Likewise, during that time, Berkley continued to make premium payments to the plaintiff, totaling approximately $56,000. Between 2006 and 2008, however, Trenwick began falling behind on its SCARF II payments and the SCARF II administrator began pressing Trenwick for the past due payments.

In January, 2008, Stephen Eisenmann became an executive vice president and officer of the Trenwick. In that capacity, he had the opportunity to review the commutation agreement. On the basis of his review of the commutation agreement, Eisenmann concluded that it commuted SCARF II and therefore Trenwick had no obligation to make payments to the defendant pursuant to SCARF II after the commutation agreement went into effect on September 3, 2004. Eisenmann determined that, based on the commutation agreement’s language, the agreement was global, thereby commuting all reinsurance agreements between Trenwick and Berkley, including SCARF II, as of the effective date of the commutation agreement. Trenwick stopped making further payments under SCARF II and sought a return of the sum of $451,006.72, an amount it believed it had unnecessarily paid to the defendant pursuant to SCARF II. Berkley disagreed with Eisenmann’s conclusion that the commutation agreement commuted SCARF II and that the money paid following the execution of the commutation agreement should be returned.

Trenwick instituted an action seeking a declaration that the commutation agreement commuted SCARF II.  Following a bench trial, the court held as to count one that the commutation agreement did, in fact, commute SCARF II. As to count two, the court held that the restitution sought by the plaintiff was barred pursuant to the voluntary payment doctrine.

ANALYSIS

If the contract was entered into as a result of a mutual mistake it can be reformed to fulfill the intent of the parties. Berkley sought such reformation. However, a cause of action for reformation of a contract in Connecticut rests on the equitable theory that the instrument sought to be reformed does not conform to the real contract agreed upon and does not express the intention of the parties and that it was executed as the result of mutual mistake. Before a court can reform a contract for mutual mistake it must be established that both parties agreed to something different from what is expressed in writing, and the proof on this point should be clear so as to leave no room for doubt.

The contract was drafted and signed by an officer of Berkley who was experienced in such matters. In fact, in the commutation agreement itself Berkley affirmatively represented that it had read and understood the commutation agreement and that it was not relying on any representations outside of the contract. In addition, the commutation agreement states in multiple places that it fully and finally terminates all of the parties’ reinsurance relationships.

It is clear from the provisions of SCARF II that it falls squarely within the definition of reinsurance. Finding the commutation agreement not ambiguous the court of appeal concluded there was no basis to reform the agreement.

When the parties stand on an equal footing, each having access to his own copy of the written contract, upon the true interpretation of which the existence of a debatable legal obligation depended they cannot claim they were deceived.  When the parties to a written contract stand on an equal footing as to means of knowledge of their contract obligations, money paid by one to the other, in part performance of the contract, in response to a claim made in good faith and based upon a permissible but erroneous construction of the contract, cannot be recovered back as money paid under a mistake of law.

The trial court found that prior to Trenwick’s realization that its obligations under SCARF II were relieved by the commutation agreement, it accepted premium payments from Berkley. In like manner, Trenwick paid policy claims to the administrator of SCARF II, which were then remitted to Berkley’s subsidiary, Signet Star. Thus, both parties were carrying out their obligations pursuant to the agreement as they understood them and the benefits bargained for by one party were in direct proportion to the benefit conferred on the other, as contemplated in SCARF II. For four years Trenwick and Berkley, erroneously, but in good faith, believed that the obligations of SCARF II remained in effect notwithstanding the commutation agreement, and, during that time period, both parties performed their respective obligations and conferred anticipated benefits on each other, as they believed them to be.

Accordingly, the court of appeal found that there was no evidentiary foundation for the court to have determined that one party had been unjustly enriched at the expense of the other. On that basis, it agreed with the trial court’s conclusion that restitution was not appropriate.

ZALMA OPINION

Although contracts dealing with insurance are often construed against the drafter because of the unequal bargaining power of the parties when two insurers deal with each other the court will treat them as equals and will not weigh one against the other.

These two insurers both had the knowledge and power to understand what were the terms and conditions of the commutation agreement. Trenwick found it erred in believing it needed to honor SCARF II and when it then insisted that the commutation agreement must be enforced it was correct and Berkley, who had no excuse for not understanding the contract it drafted, could not have it changed to keep SCARF II in force.

Failure to read and understand a contract between two equal parties is no excuse.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Anger Resolves Nothing

Good Faith is a Two Way Street

Most states, including Louisiana, require insurers to pay all agreed claims within 30 days of the agreement. Sometimes it is difficult for an insurer to cross all the “t’s” and dot all the “i’s” to get payment within the required 30 days. When it is difficult or impossible to make the payment within the required 30 days the parties have a choice to explain the problem and work together to get the payment made as soon as possible or, succumb to anger and file another suit seeking punishment of the insurer for delay.

In Katie Realty, Ltd. D/B/A the Landry Building v. Louisiana Citizens Property Insurance Corporation, No. 2012-C-0588 (La. 10/16/2012) the Supreme Court of Louisiana was called upon to resolve such a dispute and whether, dealing with different Louisiana statutes, a written settlement agreement compromising a contested property insurance claim constitutes “proof of loss” under Louisiana statutes sufficient to trigger the penalties set forth in the statute for the insurer’s arbitrary and capricious failure to timely pay the settlement funds.

FACTS

Plaintiff, Katie Realty, Ltd., filed suit against defendant, Louisiana Citizens Property Insurance Corporation (Citizens), for its untimely handling of plaintiff’s Hurricane Gustav property damage claim. The matter was settled through mediation for $250,000, inclusive of penalties and fees. When Citizens failed to timely pay the settlement funds, plaintiff filed a motion to enforce settlement and assess penalties pursuant to Louisiana statutes. The District Court awarded plaintiff $125,000 in penalties. The court of appeal affirmed, finding the settlement agreement constituted sufficient “proof of loss.” It further concluded that Citizens’ misconduct warranted the imposition of penalties.

On September 1, 2008, Hurricane Gustav made landfall in south Louisiana. Commercial property owned by plaintiff, located at 1244 Barrow Street in Houma, Louisiana, sustained damage as a result of the storm. At the time, plaintiff maintained commercial insurance on the property through Citizens. On December 4, 2008 (only four months after the hurricane), plaintiff filed suit against Citizens, seeking payment of its unpaid property damage claim plus statutory penalties and attorney fees pursuant to Louisiana statutes. The petition alleged that damage quotes, totaling $192,423.98, were received by Citizens on October 24, 2008, and Citizens failed to pay the insured’s claim despite receiving this satisfactory proof of loss.

Citizens filed various exceptions and defenses and generally denied liability for plaintiff’s claim. On July 16, 2010, the parties submitted the matter to mediation and signed a written settlement agreement. According to the agreement, Citizens was to pay the amount of $250,000, plus court costs up to $1,000, within thirty days “from today,” July 16, 2010. The settlement amount included payment for Citizens’ arbitrary and capricious conduct in the handling of plaintiff’s claim.

As a courtesy, counsel for plaintiff emailed counsel for Citizens on August 11, 2010, asking him to make sure funds were received by the close of business on August 16, 2010, or his client would insist on penalties as allowed by law. On August 16, 2010, counsel for Citizens contacted opposing counsel requesting a completed W-9 form; the duly-executed W-9 was returned to Citizens that same day. The next day, counsel for Citizens left a phone message for plaintiff’s counsel, indicating a paralegal would be contacting him regarding the signing of the settlement documents. It was not until eight days later, on August 25, 2010, that Citizens contacted opposing counsel, via email, attaching a proposed receipt and release and copy of the settlement checks. Plaintiff’s counsel requested changes to the receipt and release reserving plaintiff’s right to sue for penalties and attorney fees. An agreed upon copy was signed and mailed as well as emailed on August 27, 2010. On August 28, 2010, Citizens sent an email stating the checks went out “yesterday afternoon.” Two days later, on August 30, 2010, plaintiff filed a “Motion and Order to Enforce Settlement and Assess Damages, Penalties, and Attorney’s Fees.”

The settlement checks were not received by plaintiff until August 31, 2010, forty-five days after the written settlement agreement. Moreover, it was not disputed the envelope containing the checks was post-marked August 30, 2010, not August 27, 2010, as indicated in Citizens’ email. Notwithstanding the filing of the instant proceeding, plaintiff subsequently negotiated the $250,000 check.

The District Court rendered judgment in open court on October 8, 2010, ordering Citizens to pay a penalty in the amount of fifty percent of $250,000, i.e., $125,000, inclusive of attorney fees. In rendering its decision, the District Court noted: (1) there was no evidence in the record that Citizens requested more time to pay; (2) there was no evidence offered as to why the money was paid late; and (3) plaintiff’s attorney had to remind Citizens to pay the settlement money.

DISCUSSION

It is undisputed Citizens failed to timely pay the settlement. The Legislature mandates the timely payment and adjustment of property and casualty insurance claims.

Under Louisiana jurisprudence, “proof of loss” is a vehicle meant to advise an insurer of the facts of the claim and often takes the form of an estimate of damages prepared on behalf of the insured. A settlement agreement, however, is not based on any factual determination of what the insured is owed. Rather, it is a compromise or agreement between the parties entered into in order to resolve a dispute and Citizens is unaware of any jurisprudence equating a settlement agreement to a proof of loss.

A settlement is not an insurance claim arising under a contract of insurance. Rather, it is a compromise that resolves the dispute over the insurance claim. A written settlement agreement constitutes proof of the amount due on the settlement of the claim, not the amount due on the insurance claim itself.

In the present case, the facts undisputedly demonstrate Citizens was guilty of violating a Louisiana statute by failing to timely process plaintiff’s Hurricane Gustav property damage claim upon satisfactory proof of loss. Rather than waiting out the litigation process to recover the remedies provided by the statutes for misconduct plaintiff elected to settle its penalty claim with Citizens. By settling its property insurance claim, plaintiff was precluded from bringing a subsequent action based on that claim, which was thereby compromised.

An interpretation of the statute as encompassing the settlement of plaintiff’s claim would not only renounce the validity of the settlement, but would also revive plaintiff’s compromised claim. Such an interpretation not only leads to an absurd as well as an inequitable result, but further fails to comport with the strict construction of penal provisions required by Louisiana jurisprudence.

Under the provisions of the statute, La. Rev. Stat. § 22:1973(C), when an insurer knowingly fails to timely pay a settlement, an insured “may be awarded penalties assessed against the insurer in an amount not to exceed two times the damages sustained or five thousand dollars, whichever is greater.” Here, the record evidence undisputedly shows Citizens’ actions in failing to timely pay the settlement funds were knowingly made, and as such, Citizens is susceptible to penalties, at the court’s discretion, for this misconduct. The record also supports the District Court’s finding Citizens’ actions constituted a callous indifference to its insured who had to fight at every level for every cent it was owed. However, the damages for this misconduct were not proven, and thus, the penalty for such misconduct cannot “exceed five thousand dollars.”

CONCLUSION

The written settlement of a contested insurance claim does not constitute proof of loss of an insurance claim sufficient to subject the insurer to the penalties set forth in La. Rev. Stat. § 22:1892(B) for its untimely payment of the settlement funds. Rather, the explicit provisions of La. Rev. Stat. § 22:1973(B)(2) and (C) control and the Supreme Court awarded penalties in accordance with these provisions for Citizens’ knowing failure to timely pay the settlement funds.

Accordingly, it reversed the judgment of the court of appeal and rendered judgment awarding plaintiff $5,000 in statutory penalties.

ZALMA OPINION

Resolving disputed insurance claims is sometimes difficult. During a catastrophe, like after Hurricane Gustav, insurance company personnel are hard pressed to provide service to the multiple insureds who suffer damage. Plaintiffs like Katie are impatien and filed suit within four months of the hurricane hitting land.

When suit is filed over a disputed insurance claim emotions of the parties and their counsel often run high although counsel are expected to be dispassionate and clear headed.

In this case it took a mediation to resolve the dispute. The insurer, continuing its less than reasonable conduct, took 45 days to pay the settlement amount rather than the 30 days required by Louisiana law. Rather than work together the plaintiffs’ counsel immediately filed another suit seeking penalties and fees. They convinced all courts, including the Supreme Court, that the delay was in violation of law. However, the Supreme Court applied a different statute than that by the trial court and limited the penalty to $5,000.

Both sides spent a great deal of money on lawyers and appeals when they could have resolved their dispute like gentlemen.

It is time that insurance claims be resolved by reasonable people working together without allowing emotion and anger to take control over good common sense. There is no question that plaintiffs’ counsel spent more in time and energy than the $5,000 the plaintiffs eventually received. Both sides forgot that insurance is a business of utmost good faith where the insured must act just as fairly and in good faith to the insurer as the insurer must act fairly and in good faith to 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Employee Dishonesty Covered

Embezzlement From Payroll Account Not Salary

When an insurer interprets its insurance policy it must read the entire contract and apply the facts to the wording of the policy to determine coverage. It should never read the policy with a highly restrictive interpretation in an attempt to avoid coverage. Rather, it should read the grant of coverage broadly and the exclusions narrowly with an intent to provide coverage to the insured if possible.

Amerisure Insurance Company (Amerisure) appealed from the trial court’s decision that the commercial insurance policy Amerisure sold to Debruyn Produce Company (Debruyn) covered the losses caused when Debruyn’s former controller issued herself unauthorized checks from the payroll account. In Amerisure Insurance Company v. Debruyn Produce Company, No. 307128 (Mich.App. 10/16/2012) the Michigan Court of Appeal was asked to resolve the dispute.

In February of 2010, Debruyn discovered that its former controller, Jillone Phillips, had been issuing herself unauthorized checks. When doing payroll, Phillips would create a second check to herself for the same amount as her actual payroll check. These additional checks were also paid out of the payroll account. Phillipsthereby doubled, without the approval of her employer, her effective net salary. She did not pay taxes or withholding on the additional checks, but simply wrote them for the same net amount as her regular paycheck.

Phillips was convicted of embezzlement for this activity.

The Claim

Debruyn filed a claim with Amerisure under the “employee dishonesty” portion of the insurance policy. Amerisure denied the claim on the basis that the loss did not constitute the type of employee dishonesty covered by the policy. On September 7, 2010, Amerisure filed a declaratory action, seeking a ruling that it is not liable to Debruyn on this claim. After both parties filed motions for summary disposition the trial court held that Phillips’s misconduct did constitute employee dishonesty under the insurance policy, such that Amerisure was required to cover Debruyn’s claim. Amerisure appealed.

This case revolves around the interpretation of the insurance policy provided to Debruyn by Amerisure. A number of cases from other jurisdictions have addressed the same or similar contractual language as is before the court, but there appears to be no binding precedent.

The Policy

The insurance policy at issue provides coverage for “employee dishonesty,” which is defined it defines as follows:

        “Employee Dishonesty” in paragraph A.2. means only dishonest acts committed by an “employee”, whether identified or not, acting alone or in collusion with other persons, except you or a partner, with the manifest intent to:

     (1) Cause you to sustain loss; and also

     (2) Obtain financial benefit (other than employee benefits earned in the normal course of employment, including: salaries, commissions, fees, bonuses, promotions, awards, profit sharing or pensions) for:

        (a) The “employee”; or

    (b) Any person or organization intended by the “employee” to receive that benefit.

The Issues

The parties dispute only whether Phillips’s acts fall under the exclusion in subsection 2, which excludes coverage where the financial benefit received by the employee consists of “employee benefits earned in the normal course of employment.” Amerisure argued that the use of the word “earned” should not be taken to mean that any unearned benefits are covered, but rather as a general descriptor of the type of benefits excluded, i.e. those that are generally earned in the normal course of employment. Amerisure pointed out that there is no need to exclude from coverage benefits that were actually earned, because such benefits would not constitute a loss to the insured in the first place. Debruyn concedes this point, and does not base its argument on the fact that Phillips did not “earn” her additional checks.

The controlling question in this case is whether the money taken by Phillips constituted salary or not.

The appellate court concluded that Phillips’s embezzlement fell within the coverage of the policy which, among other things, covers theft by employees through forging checks, fraudulently using employer credit cards, embezzlement, stealing from inventory, and altering purchase orders to confer a benefit on the selling company. Phillips committed a classic act of embezzlement, and it was very similar to forging checks, though she had the authority to write checks on the payroll account.

In reaching its decision the appellate court considered the Third Circuit case of Resolution Trust Corp v Fidelity and Deposit Co of Maryland, 205 F3d 615 (CA 3, 2000) is particularly helpful. In that case, the officers of a company hid a troubled loan to make their company look more valuable so that they would receive more compensation when the company was bought out. The court grappled with the meaning of the exclusion and concluded:

        [w]e hold that the exclusion covers payments knowingly made by the insured to the employee as a consequence of their employment relationship and in recognition of the employee’s performance of job-related duties. Applying this standard here, we find that the golden handcuff payments fall squarely within the exclusion set forth in subsection (b), whether it be because they are considered a “bonus,” “award,” or simply a financial benefit that the employees “earned in the normal course of employment.

As the Resolution Trust Court stated, each of the eight types of compensation listed as being earned in the normal course of business share the singular characteristic that they are all financial benefits provided knowingly by an insured, in its capacity as an employer, to its employees as a form of compensation and as a result of the employment relationship.

Applying the analytical framework supplied by Resolution Trust to the present case, it is clear that the money taken by Phillips was not salary. Her employer did not intend to write her multiple checks. She simply helped herself to money under her control and was convicted of the crime beyond a reasonable doubt. It was not included in her regular paycheck and she did not pay income tax or other withholding on the money. There is no question that embezzlement is covered.

The money should not be considered salary simply because she stole it from the payroll account instead of a cash register.

ZALMA OPINION

It seems odd that an insurance company would attempt to avoid paying this claim after the embezzler was convicted and sentence by a court. The policy includes losses by embezzlement in clear and unambiguous language. The exclusion could not apply since, if the extra checks were just payment of salary she would never have been charged with or convicted of embezzlement.

The insured should be commended for taking the case through appeal and the insurer should reconsider its claims philosophy.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Defective Construction Not an “Occurrence”

Fortuity Rules

The Sixth Circuit Court of Appeal asked the Ohio Supreme Court to resolve a question that had not been resolved in Ohio about coverage for construction defects. The Supreme Court answered the Sixth Circuit’s question in Westfield Insurance Company v. Custom Agri Systems, Inc., No. 2011-1486,  Slip Opinion No. 2012-Ohio-4712.

BACKGROUND

Custom Agri Systems, Inc. built a steel grain bin that the general contractor believed was defectively constructed.  Custom filed third-party complaints against the subcontractors it had used to construct the bin and turned to its insurer Westfield Insurance Company to defend and indemnify it in the litigation. Westfield intervened in order to pursue a judgment declaring that it had no such duty under the terms of its commercial general liability (“CGL”) policy with Custom.

Custom was sued under two general theories: defective construction and consequential damages resulting from the defective construction.

Westfield argued that none of the claims against Custom sought compensation for “property damage” caused by an “occurrence” and therefore that none of the claims were covered under the CGL policy. In the alternative, Westfield argued that even if the claims were for property damage caused by an occurrence, they were removed from coverage by an exclusion in the policy.

Westfield and Custom filed cross-motions for summary judgment. The parties agreed that the case was governed by Ohio law, and the United States District Court for the Northern District of Ohio acknowledged that it was an open question under Ohio law whether defective-construction claims fall under the auspices of a CGL policy. Rather than decide the issue, the district court assumed that Custom’s policy covered defective construction and went on to find that the exclusion removed such claims from coverage. After reconsideration of an earlier order, the district court granted summary judgment for Westfield in Younglove Constr., L.L.C. v. PSD Dev., L.L.C., 767 F.Supp.2d 820 (N.D.Ohio 2011).

Custom appealed. Westfield moved to certify two questions of state law to this court. Custom did not oppose the motion. In a divided decision, the Sixth Circuit determined that the question of whether defective construction or workmanship constitutes an “occurrence” within the meaning of a CGL policy in Ohio might be determinative of the action in federal court. Furthermore, the Sixth Circuit found no controlling precedent on the issue in our decisions. For those reasons, the Sixth Circuit certified the following two questions of state law to this court:

  1. Are claims of defective construction/workmanship brought by a property owner claims for “property damage” caused by an “occurrence” under a commercial general liability policy?
  2. If such claims are considered “property damage” caused by an “occurrence,” does the contractual liability exclusion in the commercial general liability policy preclude coverage for claims for defective construction/workmanship?

The Ohio Supreme Court agreed to answer both questions.

ANALYSIS

The underlying claim is one of defective construction of or workmanship on the steel grain bin by Custom. The present action is one of contract interpretation, as the issue is whether the claims of defective construction or workmanship against Custom fall within the insurance policy issued by Westfield.

In Ohio, like other states, when confronted with an issue of contractual interpretation, the court considers its role is to give effect to the intent of the parties to the agreement.

The insurance policy provides, in part:

“1. Insuring Agreement a. We 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. … 

“b. This insurance applies to “bodily injury” and “property damage” only if:

“(1) The “bodily injury” or “property damage” is caused by an “occurrence” that takes place in the “coverage territory;”
* * *
“17. “Property damage” means:

“a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.”

CGL policies are not intended to protect business owners against every risk of operating a business. In particular, the policies are not intended to insure “business risks” that are the normal, frequent, or predictable consequences of doing business, and which business management can and should control or manage. Courts generally conclude that the policies are intended to insure the risks of an insured causing damage to other persons and their property, but that the policies are not intended to insure the risks of an insured causing damage to the insured’s own work. In other words, the policies do not insure an insured’s work itself; rather, the policies generally insure consequential risks of loss that arise from the insured’s work.

All of the claims against which Westfield is being asked to defend and indemnify Custom relate to Custom’s work itself, i.e., the alleged defective construction of and workmanship on the steel grain bin. Although it is a widely accepted principle that such claims are not covered by CGL policies, the Supreme Court did not end its review there. Specifically, it was required to decide whether Custom’s alleged defective construction of and workmanship on the steel grain bin constitute property damage caused by an “occurrence.”

In the CGL policy issued by Westfield the word “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The word “accident,” however, is not defined in the CGL policy. Therefore, “accident” must be given its natural and commonly accepted meaning.

Insurance, by definition, requires fortuity. Applying this rule in the construction context, truly accidental property damage generally is covered because such claims and risks fit within the general understanding of fortuity. Conversely, the Ohio Supreme Court concluded that faulty workmanship claims generally are not covered, except for their consequential damages. This is so because they are not fortuitous.

Claims for faulty workmanship are not fortuitous in the context of a CGL policy. In keeping with the spirit of fortuity that is fundamental to insurance coverage, the Supreme Court held that the CGL policy does not provide coverage to Custom for its alleged defective construction of and workmanship on the steel grain bin.

ZALMA OPINION

The decision was not unanimous and reached over a strenuous dissent. Regardless, the decision applies the age-old rule that insurance can only insure against fortuitous events, not the expected business risk of doing a job badly. Custom built a defective steel bin. The construction of the bin did not damage any other property.

Since the loss claimed by the general contractor was neither contingent or unknown to Custom it was not fortuitous and there could be no coverage available to defend the suit claim Custom did its work badly and breached its contract with the general contractor.

CGL insurance covers many things but does not, nor can it, cover every possible problem faced by a business.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Evil Gets a Hearing At the Supreme Court

Black Widows Remain in Jail For Life

Evil should not be honored by the courts. The infamous Black Widows who killed homeless men and defrauded insurers of millions had the unmitigated gall to claim that their Sixth Amendment right to confront witnesses against them was violated when toxicology reports performed by others were testified to by the lead toxicologist.

Helen Golay and  Olga Rutterschmidt were in their mid-70’s when they were convicted of murdering two men – one in 1999, the other in 2005 – by running over each of them with a car. Issued in each victim’s name were life insurance policies listing defendant Golay and co-defendant Rutterschmidt as beneficiaries. They collected $589,124.93 on one victim’s life insurance policies; with respect to the other victim, Golay received $1,540,767.05, and Rutterschmidt $674,571.89.

Facts and Procedural History

A. Murder of Paul Vados

In 1997, Paul Vados, then about 70 years old, moved into an inexpensive apartment on South Fedora Avenue in Los Angeles. Between 1997 and 1999, applications for at least six policies insuring Vados’s life were made on his behalf. Some policies listed either defendant Golay or co-defendant Rutterschmidt as a beneficiary, while others listed both. Rutterschmidt was listed as Vados’s cousin and Golay as his fiancee. In fact, Rutterschmidt and Vados were unrelated, and lacking is evidence of a romantic involvement between Golay and Vados.

On the morning of November 8, 1999, the body of 73-year-old Vados was found lying in an alley near North La Brea Avenue in Los Angeles, about a mile from Rutterschmidt’s home. Nine days later, defendant Golay and co-defendant Rutterschmidt reported to the police that Vados had been missing for over a week. Rutterschmidt, who signed the missing person report, described herself as Vados’s cousin. Golay and Rutterschmidt collected $589,124.93 on the insurance policies taken out on Vados’s life.

B. Murder of Kenneth McDavid

In September 2002, defendant Golay leased, and paid for, an apartment for Kenneth McDavid, who had been homeless and living outside a church in Hollywood. Between November 2002 and March 2003, Golay and Rutterschmidt submitted 17 applications for insurance policies on McDavid’s life. Thirteen policies were issued by various insurance companies. As had occurred with murder victim Vados, most of the policy applications described Golay as McDavid’s fiancee and Rutterschmidt as his cousin, and some policies listed either Golay or Rutterschmidt as a beneficiary, while others listed both.

On October 30, 2004, co-defendant Rutterschmidt came to McDavid’s apartment with a hired, armed security guard. She told McDavid to leave, and told the guard to stay in the apartment for a week to prevent anyone from entering. Defendant Golay paid a portion of the guard’s fee. At approximately 1:00 a.m. on June 22, 2005, nine months after McDavid’s eviction from the apartment, his dead body was found lying in an alley near the corner of Westwood Boulevard and Santa Monica Boulevard in Los Angeles.

In August 2005, Rutterschmidt, claiming to be McDavid’s cousin, asked the police for a copy of the report on McDavid’s death in the alley. Rutterschmidt and Golay then filed claims under the insurance policies on McDavid’s life. Golay collected $1,540,767.05, and Rutterschmidt $674,571.89.

In Golay’s house, police found a pill container bearing a prescription label for Ambien (a sleeping pill), but containing a crushed powder that later was determined to have Vicodin (a pain killer), Venlafaxine (an antidepressant that causes drowsiness), and Temazepam (an anti-anxiety drug that causes drowsiness). Also found were two pill containers with prescription labels for Vicodin (prescribed for Golay), and pill containers with prescription labels for Venlafaxine and Temazepam (prescribed for Golay’s daughter, Kecia).

The Mercury Sable station wagon that co-defendant Rutterschmidt had bought in 2004 was impounded and sold at a lien sale after it was found abandoned. In May 2006, the Los Angeles Police Department repurchased the car. When criminalist Cheryl Hill examined the car’s undercarriage, she found human blood, hair, and tissue samples. The tissue samples matched murder victim McDavid’s DNA profile; the probability that a randomly selected person would have the same profile was one in 10 quadrillion.

C. Toxicology Analysis of Murder Victim McDavid’s Blood

The prosecution’s theory was that defendant Golay had drugged McDavid before killing him. To prove this, the prosecution presented the testimony of Joseph Muto, a toxicologist and a certified blood-alcohol analyst.

Muto said he was the laboratory director of the Los Angeles County Department of the Coroner, and that four laboratory analysts working under Muto’s supervision had tested samples of McDavid’s blood in July of 2005, two weeks after his death. The tests showed that McDavid’s blood contained alcohol, zolpidem (the generic form of sleep aid Ambien) and hydrocodone (the generic form of painkiller Vicodin). Laboratory director Muto explained that after the testing the four analysts gave the data generated by their equipment to clerical staff, who then prepared a report reflecting the test results.

Golay objected to Muto’s testimony, contending that it violated her Sixth Amendment right to confront at trial the laboratory analysts who had tested murder victim McDavid’s blood samples. The trial court overruled the objection. The prosecution did not introduce the laboratory reports into evidence.

D. Verdict and Appeal

The jury found both Golay and Rutterschmidt guilty of two counts of first degree murder and two counts of conspiracy to commit murder; it also found special circumstances of multiple murder and murder for financial gain. The trial court sentenced both defendants to life imprisonment without possibility of parole. The Court of Appeal affirmed the judgment.

The Court of Appeal rejected Golay’s contention that laboratory director Muto’s testimony regarding two reports prepared by the laboratory violated Golay’s Sixth Amendment right to confront and cross-examine the analysts who performed the tests described in the reports. Moreover, the Court of Appeal stated, even if there was a confrontation right violation, the error was not prejudicial.

In June of this year, 12 days after we heard oral argument in this matter and while it was pending before us, the U.S. Supreme Court court decided Williams v. Illinois (2012) 567 U.S. ___ [132 S.Ct. 2221] (Williams). At issue in Williams was testimony by Illinois State Police forensic biologist Sandra Lambatos that a DNA profile (derived from semen on vaginal swabs taken from a rape victim) produced by a Maryland laboratory matched a DNA profile (derived from a sample of the defendant’s blood) produced by the Illinois State Police Laboratory.

The plurality opinion by Justice Alito concluded, based on two alternative grounds, that Lambatos’s expert testimony did not violate the Sixth Amendment’s confrontation right.

Discussion

The California Supreme Court concluded, after a discussion of Sixth Amendment Cases, did not need to decide, however, whether the trial court erred in allowing laboratory director Muto’s testimony, because any error did not prejudice Golay. Violation of the Sixth Amendment’s confrontation right requires reversal of the judgment against a criminal defendant unless the prosecution can show “beyond a reasonable doubt” that the error was harmless. Here, that standard is met, because the evidence of Golay’s guilt was overwhelming.

The uncontradicted evidence showed that Golay and co-defendant Rutterschmidt, through fraud, took out 13 insurance policies on murder victim McDavid; that before McDavid’s death, Rutterschmidt and another elderly woman (presumably Golay), bought a car and, to prevent being linked to the car, registered it in the name of a woman whose driver’s license had been stolen; that this was the car later used to run over McDavid; that on the night of McDavid’s killing an elderly woman identifying herself as Golay telephoned to have a tow truck take this very car from a location close to the scene of McDavid’s killing to a place near Golay’s home; and that thereafter Golay collected $1,540,767.05 under the insurance policies she had taken out on McDavid’s life.

The evidence also showed that six years earlier, Golay and co-defendant Rutterschmidt had collected $589,124.93 under various policies insuring the life of then 73-year-old Paul Vados, who, like murder victim McDavid, died from being run over in an alley by a car.

In light of the overwhelming evidence against defendant Golay, exclusion of laboratory director Muto’s trial testimony in question would, beyond a reasonable doubt, not have affected the outcome of Golay’s trial. We therefore agree with the Court of Appeal’s affirmance of the judgment of conviction.

ZALMA OPINION

Some people, like Golay and Rutterschmidt, commit insurance fraud because they are evil. The victims in this case were not just the two homeless men the Black Widows killed but the insurers who paid them over two million dollars and the people of the state of California who legitimately buy life insurance.

They will die in prison and the punishment is insufficient.

That these evil women got a hearing in the California Supreme Court who found it necessary to write a lengthy opinion to keep them in prison added the state courts as an additional victim of their crimes.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Fidelity Bond Not Liability Insurance

Bond Only Protects Insured From Infidelity

When an investment company went bankrupt and its investors lost their investment the investors took an assignment from the investment company against the insurers who had issued a fidelity bond to the investment company and sued the insurer. Arlene Abady, Duane Duffy, Pete M. Montoya, Caitlin and Denali Lowe, Pamela A. Wilson, and the Estate of Wallace N. Wilson (collectively investors) lost and appealed the trial court’s summary judgment in favor of Certain Underwriters at Lloyd’s, London (Lloyd’s), in Arlene Abady, Duane Duffy, Pete M. Montoya, Caitlin Lowe v. Certain Underwriters At Lloyd’s London Subscribing To Mortgage, 2012 COA 173 (Colo.App. 10/11/2012).

Background

In the general allegations of their complaint, investors alleged that Matthew Witt (officer), the Chief Executive Officer of Commercial Capital, Inc. (CCI), formed CCI as a real estate lending company providing short-term financing for commercial construction projects. CCI engaged in a practice known as “hard money lending,” providing commercial real estate loans to borrowers who could not otherwise obtain loans from lenders with more restrictive lending criteria.

During 2006 and 2007, CCI, through efforts by officer and other officials and employees, began to solicit private investors to invest funds into the company. The proposed investment involved the acquisition of debt securities documented by a subscription agreement and a promissory note from CCI (the notes). As part of its solicitation efforts, CCI held seminars for potential investors wherein CCI agents, including officer, described CCI, its investment characteristics, investor security, the high rate of return, and a guaranteed return of the principal amounts invested and any interest thereon.

Investors alleged that officer misrepresented among other things that:  (1) CCI had a $5 million policy in place to protect investors’ principal against loss; (2) the investments had high guaranteed rates of return; (3) the interests sold were registered with the Securities and Exchange Commission; (4) the investments were “more liquid than other private real estate strategies” and “enjoyed a superior risk return profile due to inefficiencies in the commercial lending market”; (5) CCI would conduct vigorous due diligence before granting any loans; and (6) the investments and any interest would be personally guaranteed by officer.

Investors alleged that based upon these and other misrepresentations, they collectively invested in, or loaned money to, CCI in an amount in excess of $1 million. According to investors, CCI is in default on the notes and officer has not honored his personal guarantee.

Shortly after CCI filed bankruptcy certain creditors including investors filed a motion for relief from the automatic stay in order to pursue CCI’s rights under Insuring Clause A1(b) of the Mortgage Bankers Bond No. MBB-06-00090 (the bond), which was issued to CCI by Lloyd’s. The bankruptcy court granted the motion, and the bankruptcy trustee then assigned all of CCI’s rights, title, and interest in the bond to investors, retaining thirty percent of the gross recovery less reasonable attorney fees and $50,000 to be paid to investors, with the balance to the investors.

The insuring clause provides:

DISHONESTY INSURING CLAUSE A1 Direct financial loss sustained by the Assured at any time and discovered by the Assured during the Bond Period by reason of and directly caused by

        [a] Theft of Money, Securities and other Property by any Employee of the Assured, whether committed alone or in collusion with others, or

        [b] any other dishonest acts by any Employee of the Assured, whether committed alone or in collusion with others, committed by said Employees with the manifest intent to obtain Improper Personal Financial Gain for said Employee, or for any other person or entity intended by the Employee to receive such Improper Personal Financial Gain. (Emphasis added)

The term “direct financial loss” is not defined in the policy.

Investors asserted two first-party claims against Lloyd’s: the first, as assignee of the bond and the second, a garnishment claim asserting a right to garnish Lloyd’s after obtaining judgment against CCI. These claims incorporated the general allegations of the complaint, which in turn alleged wrongdoing by CCI and its officers and employees in the marketing and management of CCI, with an additional allegation stating: “At such time as [investors] procure a judgment against CCI, CCI will have incurred a loss under the Policy.”

Following a period of discovery, Lloyd’s filed a motion for summary judgment, which the trial court granted. In its order, the trial court concluded, as pertinent here, that

  1. the bond is a fidelity bond and not a surety bond;
  2. the bond terms were unambiguous;
  3. the plain language of the bond protects only CCI;
  4. the assignment of CCI’s rights to investors did not convert their third-party claims into first-party claims; and, therefore,
  5. investors’ claims were not recoverable under the bond.

Fidelity Bonds

A fidelity bond is a contract whereby one for consideration agrees to indemnify the insured against a loss arising from the want of integrity, fidelity, or honesty of employees or other persons holding positions of trust. Although called a “bond,” fidelity contracts are in legal effect analogous to policies of insurance. It is not, however, a liability policy protecting the insured against claims that it caused damage to third parties.

Insurance contracts are liberally construed in favor of coverage for the insured, courts are wary of rewriting provisions. Courts read the various policy provisions as a whole, and neither add provisions to extend coverage, nor delete them so as to limit coverage.

The Issue

The issue the appellate court was asked to resolve was whether under this coverage, Lloyd’s would be liable to CCI for the damages suffered by investors arising out of the wrongful acts of its officers and employees in marketing interests in CCI to investors. The Court of Appeal found that the losses asserted by the investors do not constitute direct losses to CCI as contemplated by the bond. The individual investors lost money when CCI failed. There were no allegations from the investors that CCI incurred a direct loss.

Direct Losses

Investors argue that the phrase “direct financial loss” is ambiguous and, therefore, the policy should be construed in favor of providing coverage. The bond issued by Lloyd’s provided coverage for direct financial loss sustained by CCI. Because “direct financial loss” is not a term defined by the fidelity bond, the appellate court looked to the plain and ordinary meaning of the phrase, that is, free from extraneous influence or immediate.

The policy here is a fidelity bond which is to be distinguished from a liability policy. A fidelity bond covers the loss of property owned by the insured or held by the insured and for which it is legally liable, as a result of employee dishonesty and other perils. A liability policy protects the insured against claims brought by third parties who have been injured by the insured’s conduct.  A fidelity bond deals with direct losses while in the liability context, the insured’s loss is indirect; it is a third party who directly suffers the loss.

The distinction between fidelity bonds and liability policies matters because liability coverage was available from Lloyd’s, but was not purchased by CCI.

Based upon the plain and ordinary meaning of the phrase “direct financial loss,” and the purpose of the policy the appellate court concluded that “direct financial loss” sustained by CCI unambiguously refers only to the immediate loss of CCI’s property through the dishonesty of its own officers and employees.

Fidelity Bond Does Not Provide Coverage for Damages to Third Parties

The Fidelity Bond, the appellate court concluded, does not provide coverage to CCI against the risk that its officers and employees may engage in wrongful conduct directed at, and causing damages to, third parties, including investors.

CCI is liable for losses suffered by investors, if at all, under a theory of vicarious liability. To accept investors’ definition of “direct financial loss” would create the potential that any loss would be deemed a direct loss. Such an interpretation would eliminate the distinction between a direct loss and an indirect loss and would transform the bond into a liability policy.

Conclusion

The appellate court concluded that the losses asserted by investors do not constitute direct financial losses to CCI. Investors, as assignees of CCI’s rights and remedies, were precluded from seeking recovery for the claims by the language of the policy.  Since the plaintiffs were only suing as assignees of CCI and since there was no allegation that the employees deceived CCI to receive improper financial gain, the judgment in favor of Lloyd’s was affirmed.

ZALMA OPINION

The Bankruptcy of CCI eliminated the investors right to sue CCI for its false representations that caused them to invest. CCI did not have liability insurance that might have covered the allegations. CCI, rather, only purchased a fidelity bond. It is first party insurance and the investors, as assignees, had no more rights than would CCI had it not filed bankruptcy.

This case make clear that although a fidelity bond is akin to insurance it is not liability insurance and is not designed to protect third parties but only to protect 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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Poor Claims Handling Causes Litigation

Excess May Sue Primary in Kentucky for Bad Faith Refusal to Settle

Almost every tort lawsuit involves insurance. When a person or company is sued he, she or it asks its insurer to defend or indemnify he, she or it as a defendant. Many insureds are risk averse enough to buy both primary insurance and layers of excess insurance to protect against judgments in excess of the policy limit. Any competent plaintiffs’ or defense lawyer will, to protect their clients when a serious injury is involved, will immediately determine all insurance protection available to the defendant.

If there is a potential for a judgment in excess of the primary limit competent counsel for the insured will immediately give notice to the excess insurer and seek its assistance and cooperation. A competent claims handler, when the potential for an excess verdict becomes potential, will ask its insured and/or its insured’s broker if there is other insurance available to the insured to allow it – if there is an excess insurer – and the excess insurer to properly evaluate the claim.

Often, insurance claims handlers, defense counsel and plaintiffs’ counsel fail to ascertain the insurance available. In such a case reasonable settlements may be refused, settlement offers may be made for small amounts that plaintiffs’ counsel believes is the policy limit, and litigation between the insured, the primary insurer and the excess insurer will ensue.

When a primary insurer against tort liability refuses to settle and then loses at trial for amounts greater than its coverage limits, does an excess insurer in Kentucky have any rights against the primary insurer? In National Surety Corp. v. Hartford Casualty Insurance Co., 493 F.3d 752 (6th Cir. 07/30/2007) the Sixth Circuit was asked to resolve the issue whether, under Kentucky law, an excess insurer can recover against a primary insurer pursuant to the doctrine of equitable subrogation, either for the primary insurer’s failure in good faith to settle a claim or for the primary insurer’s failure to investigate whether an insured has other insurance.

The excess insurer in this case, National Surety Corporation, argued that the primary insurer, Hartford Casualty Insurance Company, acted in bad faith by failing to settle a tort claim against their mutual insured, Sufix U.S.A., and thereby exposed Sufix to excess liability. National Surety sought to step into Sufix’s shoes, pursuant to the doctrine of equitable subrogation, to assert this bad-faith claim. National Surety also sought to assert a claim against Hartford for Hartford’s failure to discover that Sufix was insured by National Surety. The district court held that National Surety did not have a cause of action under Kentucky law, and accordingly granted Hartford’s motion to dismiss.

THE FACTS

National Surety’s complaint alleged the following facts, which this court must accept as true:

  • Hartford and National Surety both issued insurance policies to Sufix U.S.A. Hartford’s policy provided $1 million in primary liability coverage and National Surety’s policy provided $10 million in excess liability coverage.
  • On or about May 19, 1998, a weed trimmer manufactured by Sufix injured Tommy Cook when the trimmer broke apart while Cook was using it.
  • In May of 1999, Cook filed suit against Sufix in Jefferson Circuit Court, alleging that the weed trimmer was defectively designed and that Sufix was grossly negligent in failing to discover the defect.
  • Hartford assumed the defense of Sufix pursuant to its insurance contract.
  • Hartford, through its attorneys, engaged in settlement negotiations with Cook, and ultimately rejected Cook’s offer to settle for the limits of Hartford’s policy (i.e., $1 million).
  • National Surety did not receive notice of Cook’s action against Sufix from Sufix or Hartford until approximately two weeks before trial.
  • National Surety alleges that because of the lack of timely notice, it was (1) unable to evaluate effectively its exposure to Cook under the excess policy, (2) unable to evaluate Cook’s settlement demand, (3) not given the opportunity to participate in or direct the preparations for the trial, and (4) unable to engage in informed settlement negotiations with Cook.
  • On May 21, 2002, a jury found Sufix liable to Cook and awarded Cook $6,486,588.44. After the trial, National Surety assumed the defense of Sufix and brought an unsuccessful appeal to the Court of Appeals of Kentucky.

THE EQUITABLE SUBROGATION ACTION

On February 24, 2005, National Surety filed suit against Hartford in the United States District Court for the Western District of Kentucky. National Surety sued Hartford for breach of contract and for violation of the common-law duty of good faith. National Surety asserted in its complaint that Hartford failed “[t]o perform an adequate investigation of the allegations that form the basis of the Civil Action,” failed “[t]o provide Sufix with an adequate and competent defense of the allegations contained in the Civil Action,” and failed “[t]o settle claims against Sufix within its policy limits so as not to expose Sufix and its assets to an excess judgment.”

National Surety claimed that it is subrogated to Sufix pursuant to the terms of the excess policy and the doctrine of equitable subrogation. Hartford filed a motion to dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(6), on the grounds that Kentucky does not recognize the right of excess insurers to sue primary insurers in a situation like this one. Second, the district court concluded that Kentucky would not follow the jurisdictions that have adopted the rule advocated by National Surety because excess insurers do not suffer an injury when a primary insurer, in bad faith, fails to settle a claim within its policy limits.

The district court reasoned that the excess insurer, National Surety, has received a premium in exchange for assuming the risk of an excess judgment and therefore suffered no wrong, while the insured, Sufix, who has been fully indemnified, has suffered no loss.

ANALYSIS

In resolving an issue of state law in a diversity case, this court must make the best prediction, even in the absence of direct state court precedent, of what the Kentucky Supreme Court would do if it were confronted with the same question of law. Because Kentucky law and policy support the majority rule that an excess insurer may recover against a primary insurer under the doctrine of equitable subrogation, and arguments to the contrary are not persuasive, the Kentucky Supreme Court would likely recognize the rule asserted by National Surety in this case.

The Kentucky Supreme Court would likely adopt the majority rule because that rule naturally follows from two other Kentucky insurance rules: (1) that an insured may sue an insurer who, in bad faith, fails to settle a claim within policy limits, and (2) that an insurer may step into the shoes of the insured, pursuant to the doctrine of equitable subrogation. In addition, the majority rule furthers Kentucky policies of encouraging fair and reasonable settlements and preventing wrongdoers from piggybacking on an insured’s insurance.

Kentucky also recognizes the doctrine of equitable subrogation. Although Kentucky courts note that equitable subrogation should be strictly limited in its application, the courts recognize that equitable subrogation has a long and rich tradition of benevolence and fairness,  and is irrevocably anchored in principles of natural justice.

Considering these two principles together leads to the conclusion that an excess insurer is permitted to step into the shoes of the insured and sue a primary insurer pursuant to the doctrine of equitable subrogation to enforce the primary insurer’s duty to avoid excessive judgments against an insured.

In Kentucky the law always looks with favor upon an agreement between two or more persons who, to avoid a lawsuit, amicably settle their differences on such terms as to them seem fair and reasonable. This principle also applies in the insurance context. For example, Kentucky’s Unfair Claims Settlement Practices Act prohibits persons in the business of entering into insurance contracts from not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonable clear.

In addition, the majority rule’s goal of preventing a primary insurer from, in bad faith, failing to settle a claim comports with Kentucky’s insurance policy goals. As discussed above, a primary insurer has an incentive to fail to settle a claim within its policy limits even though the settlement offer is objectively fair and reasonable. Although the insured has a cause of action against a primary insurer who fails to settle in good faith, when the insured has excess insurance, the insured has little incentive to sue because the harm of the primary insurer’s refusal to settle falls completely on the excess insurer.

National Surety, however, may not assert a claim against Hartford for Hartford’s purported failure to investigate whether Sufix had other insurance. Such a claim does not sound in subrogation because Sufix, who presumably knows from whom it has obtained insurance, would have had no such claim against Hartford. Instead, such a claim would presume a direct obligation of the primary insurer to the excess insurer, a concept rejected by most of those jurisdictions accepting subrogation of the primary insurer’s obligation to its insured.

For the foregoing reasons, the Sixth Circuit affirm the dismissal of the claim against Hartford to the extent it relied on the failure to investigate whether its insured had other insurance coverage, but otherwise reverse the district court’s order granting Hartford’s motion to dismiss, and remand for further proceedings consistent with this opinion.

ZALMA OPINION

This case is an example of poor claims handling which has nothing to do with the decision of the Sixth Circuit. The suit could have been avoided if the claims handler, the plaintiffs lawyer or the defense lawyer knew about the excess insurer.  Considering the verdict it is difficult to conceive that if the plaintiffs’ lawyer knew there was $11 million in available coverage that an offer of $1 million would not have been made. Similarly, applying basic the test of bad faith: if the Hartford had $11 million in coverage with the injuries involved and received a $1 million settlement offer, it probably would have accepted the offer.

When dealing with serious injuries like those incurred by the plaintiff in this case it is incumbent upon professional insurance claims people, plaintiffs’ lawyers, defense lawyers, the insured’s risk manager and the insured to involve all available insurance. There is no question the plaintiff would have been upset if the Hartford accepted its settlement offer and then informed the plaintiff of the extra $10 million in available coverage.

Even though the court found there was no duty to seek out excess coverage that could be the basis of a suit against the Hartford it found there was a suit available to the excess insurer against the primary for its alleged bad faith failure to accept the $1 million settlement offer. The case will go back to the trial court and National Surety will present evidence it hopes will find that Hartford acted in bad faith and compel the Hartford to pay the amount National Surety paid in excess of the Hartford’s limit.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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INSURED AND BODY SHOP CONVERT INSURANCE SETTLEMENT

Requirement for Insurance Must Be Honored

When a person borrows money to buy a car and promises the lender that insurance will be purchased to protect the interest of the lender the borrower must, in good faith, obtain the insurance and protect the rights of the lender whether insured or not. The owner of the vehicle, when it is damaged in an accident, must use the insurance proceeds to repair the vehicle to protect, as the borrower promised, the interest of the lender. In Los Angeles Federal Credit Union v. Edgar Madatyan et al, No. B232073 (Cal.App. Dist.2 10/11/2012) the California Court of Appeal was asked to overturn the decision of the trial court that the borrower and a body shop converted the insurance proceeds by circumventing the equitable lien the lender had in those insurance proceeds.

FACTS

Plaintiff and respondent Los Angeles Federal Credit Union (the Credit Union) prevailed in an action for conversion against defendants and appellants Edgar Madatyan and Elvis Madatyan  concerning an insurance check Edgar endorsed that was payable jointly to the owner of the damaged car and to GAD Auto Body Shop (GAD), a defendant owned by Elvis. The Credit Union, which had loaned the car owner money to purchase the car and had a lien on the car, claimed to have an interest in the insurance check because of the lien and because the loan agreement required the car owner to maintain insurance on the car.

On August 1, 2008, the Credit Union financed the purchase of a 2000 Bentley by Areg Khachikian in the amount of $136,126. The loan agreement provided that the car was collateral for the loan and required Khachikian to maintain insurance for the car. The insurance provision of the loan agreement stated, in part, “You promise to maintain property insurance in an amount necessary to protect Our security interest in the collateral, with a policy as specified by Us, in the amount and for the period required by Us, and with Us named as loss payee for Our protection. Such insurance shall protect against loss by fire, theft, and collision….”

Paul Pitts, the Credit Union’s collection manager, testified that Khachikian fulfilled his responsibility to maintain insurance on the car through a policy with Allstate. The Credit Union was not named as an additional insured or loss payee on the policy as required by the loan agreement.

In October 2008, Khachikian took his car to GAD to be repaired. Elvis owned, and Edgar managed, GAD. An Allstate adjuster went to the body shop and appraised the damage to Khachikian’s car at $39,697.35. Allstate sent Khachikian a check for that amount, naming Khachikian and GAD as payees, but not the Credit Union.

Khachikian took the insurance check to GAD and asked Edgar to endorse it. Edgar went with Khachikian to Bank of America to obtain a signature guarantee of Edgar’s endorsement. Edgar endorsed the check on behalf of GAD. Khachikian left the bank without cashing the check. Edgar did not know Khachikian before Khachikian brought his car to GAD. Edgar did not know that the Credit Union had a lien on Khachikian’s car before he endorsed the check.

Elvis stated that Khachikian’s request that GAD endorse the check was not unusual. In Elvis’s experience, “Sometimes customers decide to go somewhere else, do the work themselves, or simply hold the money until we complete the work so they know it was done right. Since I am confident of the quality of our work, and since we have a lien on the vehicle for any work performed (which means we do not release the vehicle under we are paid) I have not, in the past, refused to endorse the checks, nor, until now, experienced any problems due to endorsing a check.”

Pitts testified that insurance companies make checks payable to an insured and an auto shop to ensure that the car is repaired. In Pitts’s experience, such checks were cashed “[o]nly at the completion of the repair work to the vehicle[,] then the check is signed off by the Credit Union and paid to the body shop for the services completed.” Pitts explained that in the usual case, insurance checks were made out to the Credit Union and the body shop, and not the “customer” and the body shop, because the Credit Union had an interest in the car. As a payee on the check, the Credit Union would endorse the check after the work was completed. That was the only way to ensure that the repairs were made.

Khachikian did not authorize GAD to work on the car. GAD had not worked on the car at the time the check was signed. The insurance check was cashed. GAD did not receive any money from the check, from Allstate, or from Khachikian.

When Khachikian did not make the payments required by the loan agreement, the Credit Union repossessed the car from GAD where it had been abandoned. Upon repossessing the car, the Credit Union determined that the car was damaged and that an insurance claim had been made with respect to the damage. The Credit Union incurred costs of $47,000 to repair the car. GAD charged the Credit Union $950 in car storage fees. Khachikian, a named defendant, filed for bankruptcy that kept him from this case.

TRIAL COURT RULING

The trial court ruled that defendants converted the insurance check or its proceeds. In support of its ruling, the trial court found that Khachikian’s loan agreement with the Credit Union required Khachikian to insure the car and name the Credit Union as an insured. Khachikian insured the car, but violated the loan agreement by not naming the Credit Union as an insured. The purpose of the insurance was to repair the car in the event it was damaged. The trial court found that by assisting Khachikian in negotiating the insurance check, defendants “interfered with the [Credit Union's] right” and therefore defendants were liable for conversion.

DISCUSSION

Defendants contended that the evidence did not support the trial court’s ruling that they converted the Credit Union’s property because they did not receive and were never in control of the proceeds of the insurance check. Defendants also claimed that defendants did not know of the Credit Union’s existence.

Conversion is the wrongful exercise of dominion over the property of another. The elements of a conversion claim are:

  1. the plaintiff’s ownership or right to possession of the property;
  2. the defendant’s conversion by a wrongful act or disposition of property rights; and
  3. damages.

Conversion is a strict liability tort. The foundation of the tort rests neither in the knowledge nor the intent of the defendant. Instead, the tort consists in the breach of an absolute duty. The act of conversion itself is tortious.

Questions of the defendant’s good faith, lack of knowledge, and motive are ordinarily immaterial. The basis of a conversion action rests upon the unwarranted interference by defendant with the dominion over the property of the plaintiff from which injury to the latter results. Therefore, neither good nor bad faith, neither care nor negligence, neither knowledge nor ignorance, are the gist of the action.

The appellate court concluded that substantial evidence supports the trial court’s finding that the credit Union had an interest in the insurance proceeds represented by the Allstate check. When a party that is contractually obligated to purchase insurance for the mutual benefit of itself and another party breaches that obligation by purchasing insurance solely for its own benefit, an equitable lien is created in the uninsured party’s favor on any resulting insurance proceeds.  Khachikian’s loan agreement with the Credit Union obligated him to purchase insurance naming the Credit Union as a loss payee to protect the Credit Union’s interest in the car. Khachikian breached that contractual obligation by failing to name the Credit Union on the Allstate insurance policy thereby creating an equitable lien in the Credit Union’s favor on the proceeds from that policy. Because the Credit Union had an equitable lien in the insurance proceeds, with which defendants interfered when Edgar endorsed the Allstate check, defendants are liable for conversion. That defendants did not know that the Credit Union had an interest in the car or in the insurance proceeds is immaterial to a conversion action.

ZALMA OPINION

Lenders, unlike the Credit Union, should always ascertain that borrowers actually name the lender as an additional insured or as a loss payee on every loan made. The lender was saved from its error — although it took a lawsuit, a trial and an appeal — by the law of conversion.

People who provide services for damaged property that are asked to endorse an insurance check should never do so unless the check is to be deposited into the vendor’s account in payment for services rendered. In this case, by signing the insurance check, got nothing for the service and was required to make it good because he trusted a customer who took the money, left the Bentley, and filed bankruptcy to avoid responsibility for his conversion of the Credit Union’s money.

The villain succeeded. The body shop and the credit union lost. I can only hope that Mr. Khachikian receives a visit from the local police for the theft of the money that he knew belonged to the Credit Union. His debt to the Credit Union may have been discharged by the bankruptcy court but his debt to the state still remains.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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MORE FRAUD – LESS PROSECUTIONS

MORE FRAUD – LESS PROSECUTIONS

Continuing with the twentieth issue of the 16th Year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the October 15, 2012 issue about:

  1. the end of the story of serial fraud perpetrator Martin Frankel;
  2. how fraud caused an insurer to fail; why 85% of all health insurance fraud claims investigated by federal authorities are not prosecuted;
  3. details on how and why an administrative law judge in California stopped the California Department of Insurance from enforcing California Fair Claims Settlement Regulations that exceed the provisions of the California Insurance Code;
  4. announces a fraud training seminar by the Department of Insurance in Massachusetts;
  5. a report on higher estimates of fraud surfacing from the insurance industry;
  6. the third chapter of  “Candy & Abel” a serialized story about insurance fraud; and a report on a two new E-books from Barry Zalma, Zalma on California Claims Regulations -2013 and Zalma On Rescission in California -2013.

 

For details on the two new e-books and a list of all e-books by Barry Zalma go to http://www.zalma.com/zalmabooks.htm.

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

The last 10 of 540 posts to the blog, Zalma on Insurance, are available at http://zalma.com/blog follow:

  • No Cover for Damage to Contractor’s Work
  • Court Too Nice to Arsonist
  • Arson & the Loss Payable Clause
  • Limit on Non-Economic Damages Constitutional
  • It is Expensive to Fight Insurance Fraud & Worth Every Penny
  • Insured Who Rushed to Sue Must Submit to Appraisal
  • Statute Revokes Beneficiary Designation
  • Evidence Of Physical Manifestation Required
  • Insurer v. Insurer Suits Should Be Avoided If Possible
  • Breach of Contract Not an Accident

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

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

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

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

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

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No Cover for Damage to Contractor’s Work

No Right to Defense if No Right to Indemnity

The Wisconsin Court of Appeal, in Pamperin Rentals II, LLC, Pamperin Rentals III, LLC v. R.G. Hendricks & Sons Construction, Inc, No. 2011AP2544 (Wis.App. 10/10/2012), was called upon to resolve a dispute about the duty to defend a contractor whose work was found wanting by its customer.  R.G. Hendricks & Sons Construction, Inc., appealed a summary judgment dismissing Pekin Insurance Company. The trial court concluded that Pekin’s policy afforded no coverage for the claims asserted against Hendricks, and that Pekin therefore had no duty to indemnify or further defend Hendricks.

BACKGROUND

Hendricks was involved in the construction of several service stations. Hendricks contracted to “prepare the site and supply and install concrete, stamped concrete, and colored concrete ….” Pamperin Rentals II, LLC and others (collectively, Pamperin) sued Hendricks, alleging the concrete Hendricks supplied and installed “was defective and/or the work performed was not done in a workmanlike manner and has resulted in damages, including pitting and deterioration of the concrete, and will require replacement.” Pamperin further alleged:

 That [Hendricks's] breach has and will cause the Plaintiffs damages, including, but not limited to, concrete and asphalt repair, all appropriate testing for the installation of replacement concrete, all incidental and consequential damages related to the tear-out and replacement of concrete and asphalt, business interruption and lost profits, and all incidental and consequential damages including contractual liabilities related to business interruption.

Hendricks’s insurer, Pekin, agreed to provide a defense, subject to a reservation of its right to later contest coverage. During discovery, Pamperin disclosed that only the concrete had suffered physical damage. The alleged business interruption and physical damage to asphalt were merely expected future harms to be incurred when the concrete itself was repaired or replaced. Hendricks asserted that the exclusions would not apply if the damage to the concrete did not arise from Hendricks’s faulty workmanship. That is true; it is also irrelevant. Pamperin alleged that Hendricks’s faulty workmanship caused the damage to the concrete, and if that is not true, then Pamperin has no basis for holding Hendricks liable in the first place. For example, if a child leaves her properly constructed jump-rope on her neighbor’s lawn and the rope is damaged by a lawnmower, is the jump-rope manufacturer liable to repair or replace it?

Pekin moved for summary judgment, arguing it had no duty to indemnify or further defend Hendricks because there was no policy coverage for Pamperin’s alleged damage. Pekin argued there was no occurrence in the first instance and, additionally, the business risks exclusions applied to bar coverage. Specifically, Pekin argued exclusions k. and l. applied, which preclude coverage for damage to the insured’s product and work, respectively. The court granted Pekin’s motion, holding there was no occurrence.

DISCUSSION

Where an insurer, like Pekin, has provided an initial defense pending a final coverage determination, the “four-corners rule” – related to the duty-to-defend inquiry – is not implicated. Instead, the court simply proceeds to a coverage determination. At that time the court may consider extrinsic evidence and, if there is no arguable coverage, determine on summary judgment that there is no duty to indemnify. The insurer’s duty to continue to defend is contingent upon the court’s determination that the insured has coverage if the plaintiff proves his case. Therefore, when a court concludes there is no duty to indemnify, the insurer is relieved of its duty to further defend the insured.

Hendricks’s commercial general liability (CGL) policy affords coverage when an “occurrence” causes “property damage.” The policy defines property damage as:

         a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

            b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

Hendricks argues both definitions apply here because, regardless of the alleged damage to Hendricks’s own product or work, Pamperin alleges physical injury to asphalt and plumbing, and loss of use of its stores and carwash bays. Hendricks failed to acknowledge that no such physical injury or loss of use has happened. Since it did not happen there was no “property damage” subject to coverage.

Hendricks tried to claim that there is policy coverage because Hendricks paid a separate premium for products – completed operations coverage. It asserts that, because this is therefore a separate, purportedly expensive, coverage, the business risks exclusions do not apply. The Court of Appeal found that a plain reading of the policy reveals that it merely recognizes two types of property damage and personal injury risks – those arising from property or operations under the insured’s control, and those arising from products or work over which the insured has relinquished control – and provides separate limits of coverage for each type of risk.

The fact that the insured pays a separate (substantially discounted) premium for the (apparently diminished) risk of liability associated with products or work for which it has relinquished control does not dictate that the risk magically becomes a separate coverage grant with its own insuring agreement and set of exclusions. Rather, the products – completed operations hazard is plainly a component of Coverage A., which insures for bodily injury and property damage liability.

ZALMA OPINION

Pekin Insurance found a way to avoid the “four corners rule” by providing a defense under a reservation of rights. When discovery showed that the only property damage was to the work performed by the contractor it filed a complaint for declaratory relief because there was no potential for the policy to pay indemnity even if the plaintiff proved every allegation it had no duty to defend.

If it properly reserved its rights Pekin could also recover from its insured the fees it paid to defend Hendricks before it learned there was no potential for coverage.

What Pekin did should be followed by insurers in those states that follow the four-corners rule unless the allegations show absolutely no potential for coverage. Evidence that there is no potential for coverage is better than speculation upon the meaning of a less than perfectly pleaded law suit.

© 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 now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

 

 

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Court Too Nice to Arsonist

No Mercy to an Arsonist

Arson is a violent crime. People, usually firefighters fighting the fire, are injured and killed. It is for that reason that when a person is convicted of arson and attempted insurance fraud, he or she is usually sentenced for committing a serious felony and a violent crime. Sometimes, judges, take a liking to the criminal when he or she admits to the crime and imposes a sentence that does not recognize the seriousness of the crime.

Giovanni Naccarato (“Naccarato) entered a plea of nolo contendere to four counts of burning a dwelling house, one count of burning insured property, and one count of arson of personal property having a value of $1,000 or more but less than $20,000. Naccarato was sentenced to a term of three years’ probation for all six counts and was ordered to make full restitution to the tenants of the building he burned down and his insurance company. The state appealed the sentence in People of the State of Michigan v. Giovanni Naccarato, No. 305222 (Mich.App. 10/04/2012)

FACTS

On October 6, 2007, at around 1:00 p.m., firefighters responded to a fire at an apartment building owned by Naccarato. Naccarato had previously evacuated the building under the guise that the buildin