More than Judgment Is More Than Enough

Greed Succeeds But Still Not Enough

Alabama has an interesting procedure when dealing with underinsured motorist (UIM) benefits. If the Underinsured Motorist’s insurer offers its limits and the UIM insured does not want to accept the offer the UIM insurer can pay the amount of the offer to its insured and opt out of the case. The UIM insured, as a result, has the benefit of the offer and can take the chance of trial. If a win at trial they keep give the UIM insurer the amount collected and keep any excess. The problem arises when the trial gives them less than the offer.

In State Farm Mut. Auto. Ins. Co. v. Brown, — So.3d —-, 2015 WL 5918750 (Ala.Civ.App., 10/09/2015) Insureds brought action against automobile insurer to recover underinsured motorist (UIM) benefits for punitive damages not covered by tortfeasor’s liability policy, even though insurer had advanced liability coverage limits to insureds. State Farm Mutual Automobile Insurance Company (“State Farm”) appeals from a judgment entered by the Mobile Circuit Court against State Farm and in favor of Jacqueline Brown and Cleo Brown.

The Browns sued John Joseph Kramer, seeking compensatory and punitive damages after the Browns had been involved in an automobile accident with Kramer. The Browns were insured by a State Farm policy, which provided underinsured-motorist (“UIM”) coverage for the Browns. Accordingly, the Browns also named State Farm as a defendant, seeking to recover UIM benefits. Kramer’s liability insurer, USAA Casualty Insurance Company (“USAA”), offered to pay the Browns $200,000, which represented the policy limits of Kramer’s policy, in full settlement of the Browns’ claims against Kramer.

State Farm, pursuant to the Alabama Supreme Court case Lambert v. State Farm Mutual Automobile Insurance Co., 576 So.2d 160 (Ala.1991), agreed to pay the Browns the $200,000 offered by USAA in order to secure its subrogation rights against Kramer. In doing so, State Farm substituted its funds for the $200,000 the Browns would have received in settlement from USAA. State Farm also elected to “opt out” of the litigation between the Browns and Kramer.

The Browns’ claims against Kramer proceeded to trial, and the jury rendered a verdict in favor of the Browns in the total amount of $90,000, which consisted of $80,000 in compensatory damages and $10,000 in punitive damages. Kramer’s liability policy with USAA did not provide coverage for punitive damages. Accordingly, USAA deposited a total of $80,000 with the trial court.

The Browns conceded that State Farm was entitled to the $80,000 based on the substitute payment it had made. A dispute, however, arose between the Browns and State Farm regarding the $10,000 punitive-damages award.

According to the Browns, because Kramer’s liability policy excluded coverage for punitive damages, Kramer was uninsured for such damages, and, thus, they argued, State Farm was required to pay $10,000 to the Browns pursuant to the Browns’ UIM coverage. State Farm, on the other hand, asserted that the Browns were entitled to retain all of the $200,000 that State Farm had advanced to the Browns which exceeded the total verdict by $110,000. Thus, State Farm argued, the Browns had already recovered more than the total amount of the verdict, and State Farm was not required to pay an additional $10,000.
The trial court agreed with the Browns and entered a judgment against State Farm in the amount of $10,000, plus interest. State Farm appealed.

ANALYSIS

USAA offered to pay the Browns $200,000 in full settlement of all of the Browns’ claims. State Farm advanced those funds to the Browns. At that point, the Browns had recovered all the funds to which they ultimately became legally entitled as a result of the jury’s verdict. Indeed, the Browns recovered more than the amount to which they were legally entitled, as State Farm concedes that the Browns had the right to keep the entire $200,000 advance made. Accordingly, we agree with State Farm’s argument that it was not required to pay the Browns an additional $10,000.

In Alabama, Omni Insurance Co. v. Foreman, 802 So.2d 195 (Ala.2001), holds that UIM benefits can include punitive damages that are owed by an underinsured tortfeasor. In the present case, although the Browns were legally entitled to recover punitive damages from Kramer, the Browns unquestionably received, pursuant to State Farm’s advance, more than the total sum of damages to which they were entitled.

Neither the letter nor the spirit of the Uninsured Motorist Act supports an additional award to the Browns of $10,000 from State Farm. By making an advance payment in accordance with Lambert, a UIM carrier assumes the risk that it may not be fully reimbursed by the tortfeasor’s liability-insurance carrier, but it does not assume the risk that it will become obligated to pay the insured UIM benefits for damages for which the insured has already been fully indemnified.

Thus, the trial court’s judgment against State Farm was reversed.

ZALMA OPINION

The procedure set up by the Alabama Supreme Court Worked. State Farm took a chance that the tort case the Browns’ brought was worth $200,000 or more. The Browns agreed and took their case to trial only to get a verdict of $90,000, $10,000 of which was punitive damages. They demanded an extra $10,000 from State Farm although they had already received more than the judgment and even convinced the trial court. The Court of Appeal used logic and law and refused to allow a bonus when the UIM insureds had already been fully indemnified.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

FacebookTwitterGoogle+TumblrLinkedInDeliciousDiggDiigoGoogle BookmarksPrintFriendlyShare
Posted in Zalma on Insurance | Comments Off on More than Judgment Is More Than Enough

You Only Get What You Order

Request for “Full Coverage” Is Not Specific Enough to Hold Agent Liable

It is common knowledge that most people buy insurance based on price and do not read anything provided to them by their insurance company. It is only when there is a loss for which there is no coverage that the insured then claims that their insurance agent or broker failed to properly protect them. Rarely do these attempts succeed. When they do it is because they set up a special relationship with their agent or broker.

In Watson v. Elswick, Not Reported in S.W.3d, 2015 WL 5896995 (Ky.App., 10/09/2015)  the Kentucky Court of Appeal was faced with an attempt to obtain from an insurance agent what the insured did not get when they failed to buy underinsured motorist (UIM) coverage.

FACTS

George Stephen Watson and Charmin Watson’s adult son, Dustin, was injured in an automobile accident. After discovering that their insurance policies did not include underinsured motorist (UIM) coverage, the parents filed a complaint alleging negligence against their insurance agent, Kenneth Elswick. The Scott Circuit Court granted summary judgment to Elswick.

Elswick is an agent for Kentucky Farm Bureau Insurance Company. The Watsons had been his clients for twenty-six years. According to Watson, he asked Elswick on several occasions if they had “full coverage” automobile insurance and was assured that they had “the best insurance money can buy.” Neither of the Watsons ever specifically asked about or requested UIM coverage, and testified that they did not even know what it was prior to their son’s accident.

At the time of Dustin’s accident in 2006, the Watsons had two insurance policies covering three vehicles. Neither policy included UIM coverage. Dustin, who was twenty-three years of age, resided with his parents. He was not a named insured on either of the policies. Dustin was a passenger in a pickup truck belonging to a third party that went off the road and down a hillside. Dustin sustained severe injuries to his arms. The Watsons’ attorney advised them to check with their insurance agent to see if they had UIM coverage. Elswick informed the Watsons that they did not have UIM coverage.

The trial court’s grant of summary judgment was based in part on its determination that, under the factual circumstances of this case, Elswick had no duty to advise the Watsons regarding the availability and function of UIM coverage.

STATUTORY REQUIREMENT

The question of duty presents an issue of law.  Generally, no affirmative duty to advise is assumed by mere creation of an agency relationship. A Kentucky statute requires that “Every insurer shall make available upon request to its insureds underinsured motorist coverage, whereby subject to the terms and conditions of such coverage not inconsistent with this section the insurance company agrees to pay its own insured for such uncompensated damages as he may recover on account of injury due to a motor vehicle accident because the judgment recovered against the owner of the other vehicle exceeds the liability policy limits thereon, to the extent of the underinsurance policy limits on the vehicle of the party recovering.”

The statutes also provide that “[e]xcept where the maximum limits of coverage have been purchased, every notice of first renewal shall include a provision or be accompanied by a notice stating in substance that added uninsured motorists, underinsured motorists, and personal injury protection coverages may be purchased by the insured.”

ANALYSIS

In Kentucky UIM coverage is optional, not mandatory. The legislature obviously could have made underinsured coverage mandatory but elected to require it to be furnished only “upon request.”

There are numerous optional coverages available. For example, upon payment of additional premium, higher limits may be provided; coverage for various deductible amounts on collision insurance; reimbursement for car rentals while your car is being repaired; reimbursement for towing and labor; accidental death and dismemberment can be included; theft of radio and sound equipment coverage is available; reimbursement for loss of wages during disability is another option and many more options. There is no reasonable way for a court to conclude that a request for “full coverage” would include all or even any optional coverages, unless specifically requested. “Full coverage,” as used in relation to automobile or motor vehicle insurance, means insurance in such amount and for such coverage as is made mandatory by statute.

The court’s examination of the policies in the record showed that the notice provision required by the statute about uninsured and UIM coverage was included in a separate paragraph with an italicized heading stating “You Should Review Your Coverage”  The policies at issue complied fully with the statutory requirements.

In this case, there was no evidence that the Watsons paid Elswick any consideration beyond the policy premiums. Their twenty-six year course of dealing with Elswick was lengthy, but there was no evidence that they sought out and relied on his advice beyond the general request for “full coverage,” which precedent establishes was inadequate to trigger a duty to advise.

Indeed, the deposition testimony indicates that the Watsons never spoke with Elswick about any specific aspects of their insurance coverage beyond such generalities as “full coverage.” Finally, there is no evidence that the Watsons made a clear request for advice regarding their insurance coverage.

The trial court correctly ruled as a matter of law that Elswick did not breach statutory or common law duties to advise.

ZALMA OPINION

People who want an insurance agent to provide it with direct advice and counsel concerning the insurance they should buy must set up a relationship with the agent, agree to pay the agent for the service, and then take the advice given. If no, if price is all the insured cares about, then the insured must live with the coverage purchased. In this case the insureds ignored the advice in the policy about the availability of UIM coverage and then tried to blame their agent for not acquiring for them the coverage they did not order.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on You Only Get What You Order

Zalma’s Insurance Fraud Letter — 10-15-2015

The Essential Resource For The Insurance Fraud Professional

A ClaimSchool ™  Publication, Written by Barry Zalma, Esq., CFE
©  2015 ClaimSchool, Inc. & Barry Zalma
Volume 19, No. 20 –  October 15, 2015

Subscribe to e-mail Version, it’s Free! or read at http://www.zalma.com/ZIFL-CURRENT.htm 
Go to my blog Zalma On Insurance at http://zalma.com/blog

Go to Zalma Books – E-Books and Articles by Barry Zalma – http://www.zalma.com/zalmabooks.htm

Zalma’s Insurance Fraud Letter – October 15, 2015

Insurance Fraud & Ethics

Insurance fraud investigations must be conducted fairly, thoroughly, and always in good faith. Insurance professionals must understand and act ethically in everything they do in their claims investigations and evaluation of an insurance policy and its coverages.

The current issue of ZIFL reports on:
1.    The FBI and Medical Equipment Fraud
2.    Proformative Academy
3.    Ethics & Fraud Investigation
4.    New From Barry Zalma & E-Books from Barry Zalma
a.    Insurance Law
b.    Insurance Fraud and Weapons to Defeat Fraud
c.    Getting the Whole Truth
d.    Random Thoughts on Insurance – Vol. III
5.    Failure to Answer Questions at EUO Defeats Claim.
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.
ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

New to the Blog are Videos called “Insurance 101″ that explain in brief video presentations major issues in insurance and insurance claims handling adapted from “Insurance Claims: A Comprehensive Guide.” I intend to post a video five days a week along with my regular blog posts summarizing new appellate insurance coverage decisions. The most recent posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

•    Insurance 101 – Volume 9 – What Kind of Investigation Needed to Determine Coverage? – October 14, 2015
•    Mistake of Legal Effect of Agreement Not Enough to Reform a Contract – October 14, 2015
•    Insurance 101 – Volume 8 – The Difference Between Property & Liability insurance – October 13, 2015
•    Follow Rules or Else! – October 13, 2015
•    Insurance 101 – Volume 7 – What Is Liability Insurance? – October 12, 2015
•    Actual Controversy Required for Declaratory Relief – October 12, 2015
•    Insurance 101 – Volume 6 – Conditions – October 9, 2015
•    $40 Million Bad Bet – October 9, 2015
•    Insurance 101 – Volume 5 – Adjusting and Ethics – October 9, 2015
•    Insurance 101 — Important Insurance Terms — Volume 4 – October 8, 2015
•    Insurance 101 — What Is Insured By a First Party Property Policy – October 8, 2015
•    Court Rules in part in Favor of Defendant Who Defaulted – October 8, 2015
•    Insurance 101 – Video 2 – Actual Cash Value – October 7, 2015
•    McCarran-Ferguson Act Prohibits RICO Action Against Insurer – October 7, 2015
•    What Is Insurance? – October 6, 2015
•    Insured Must Rebuild to Collect Holdback – October 6, 2015
•    Lie to Your Insurer at Your Risk – October 5, 2015
•    Materiality Needed to Rescind a Policy – October 2, 2015
•    Zalma’s Insurance Fraud Letter – October 1, 2015 – October 1, 2015
•    When a Court Errs by Ignoring a Full Credit Bid – September 30, 2015

NEW FROM NATIONAL UNDERWRITER
Available from the Zalma Insurance Claims Library.

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

New From The American Bar Association
How to Determine the Proper Measure of Damage to Real and Personal Property
This book was written to provide sufficient information to those who became interested in the issue since the Georgia Supreme Court decided State Farm Mutual Automobile Insurance Co. v. Mabry, 274 Ga. 498, 556 S.E.2d 114 (Ga. 11/28/2001) and includes cases dealing with the use of diminution in value as a method of determining the amount of loss incurred by a plaintiff seeking indemnity for damage to real or personal property.
This edition has been totally rewritten and expanded, providing the most extensive and detailed coverage of the issue and a thorough explanation of how to apply diminution in value damages to losses to property.
ISBN: 978-1-63425-295-8, Product Code: 5190524, 2015, 235 pages, 7 x 10, Paperback
Available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972
Barry Zalma
Mr. Zalma is an internationally recognized insurance coverage and insurance claims handling expert witness or consultant.  He is available to provide advice, counsel, consultation, expert testimony, mediation, and arbitration concerning issues of insurance coverage, insurance fraud, first and third party insurance coverage issues, insurance claims handling and bad faith.

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

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

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

Click Here to Obtain today’s Issue.

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter — 10-15-2015

Mistake of Legal Effect of Agreement Not Enough to Reform a Contract

Poor Lawyering Can’t Be Cured By Changing Contract

Greed, including the need seek punitive damages from an insurer, results in settlements where the defendant assigns its rights to sue its insurer, often results in poorly drafted agreements. The Supreme Court of Oregon, in A&T Siding, Inc. v. Capitol Specialty Ins. Corp., — P.3d —-, 2015 WL 5920072 (Or., 10/08/2015) was asked by the United States Court of Appeals for the Ninth Circuit to resolve Oregon law whether  a settlement that included an unconditional release and covenant not to execute against the builder could be amended to force an insurer to pay the agreed settlement that the original agreement prohibited.

After losing in its suit against the insurer because of the unconditional release, the homeowner’s association and the builder amended their settlement agreement to eliminate the unconditional release and covenant not to execute. They lost again in federal court seeking damages based on the amended agreement and pn appeal, the Ninth Circuit certified a question to the Oregon Supreme Court asking whether the homeowner’s association and the builder could amend their settlement agreement in such a way as to revive the liability of the builder’s insurer.

BACKGROUND

The Brownstone Homes Condominium Association discovered defects in the construction of its 26–building condominium complex, including wood decay, flashing delamination, and water penetration. Brownstone estimated that A & T’s share of the cost of repair was approximately $2 million. A & T was insured by Capitol Specialty Insurance Corporation and Zurich Insurance.

Brownstone eventually settled with A & T and Zurich. The settlement agreement included the following provisions that are relevant to the certified questions. First, A & T agreed to a $2 million stipulated judgment against it and in favor of Brownstone, $900,000 of which would be deemed satisfied by Zurich’s payment to Brownstone of that amount on A & T’s behalf. Second, Brownstone covenanted that “in no event will it execute upon or permit the execution of the stipulated judgment against A & T or its assets.” Instead, the parties agreed that Brownstone would be entitled “to seek recovery of the unexecuted portion of the judgment against Capitol.” The parties mutually agreed to release each other from “all past, present and future claims” arising out of the dispute. Capitol—whose liability is entirely derivative of its insured’s— claimed it was likewise released from any liability.

The trial court granted Capitol’s summary judgment motion, and entered judgment against Brownstone.

After judgment had been entered, Brownstone and A & T executed an “addendum” to their settlement agreement.  The addendum thereafter eliminated the original assignment of A & T’s claims against Capitol and replaced it with a requirement that A & T itself pursue any claims it might have against Capitol under Brownstone’s direction and at Brownstone’s expense. The addendum also replaced the original unconditional covenant not to execute against A & T with a narrower promise not to execute against A & T while A & T’s action against Capitol was pending. The addendum further declared that Brownstone would provide a full satisfaction of the judgment against A & T upon payment of any proceeds obtained in the action against Capitol to Brownstone. Finally, the addendum replaced the original unconditional release of “each and every other settling party” with a release only of Zurich.

The District Court concluded that it would not “enforce an agreement entered into by the parties the express intent of which is to circumvent the finality of a valid order, and resulting judgment, that bar[s] the claim * * * sought to be asserted,” because doing so would undermine the finality of court actions.

ANALYSIS

No one contests the right of Brownstone and A & T to negotiate an amendment to the original settlement agreement. A & T’s sole argument appears to be that it and Brownstone, in effect, reformed the original settlement agreement, even if they did so without calling on the equitable authority of a court to effectuate that remedy. As A & T sees things, the original agreement contained a “mistake of law,” in that the parties “misapprehended” the legal effect of what they had agreed to and did not intend to execute an unconditional release and covenant not to execute that would relieve A & T—and, ultimately, Capitol—of any further liability. The negotiated reformation, A & T contends, rendered the original agreement void, so that any liability to which A & T agreed under the later, reformed agreement was not a new contractual liability, but instead related back to the underlying Brownstone litigation, which was covered by Capitol’s policy.

Reformation, strictly speaking, is an equitable remedy by which a court may revise the written expression of an agreement to conform to the intentions of the parties to it. Modern reformation doctrine provides that the judicial remedy is available when the parties, having reached an agreement and having then attempted to reduce it to writing, fail to express it correctly in the writing. Their mistake is one as to expression — one that relates to the content or effect of the writing that is intended to express their agreement — and the appropriate remedy is reformation of that writing properly to reflect their agreement.

According to A & T, even though the parties did not obtain the judicial remedy of reformation, they effected their own private reformation by executing the addendum to the original agreement. Because reformation is used to revise the written contract so that it conforms to the antecedent agreement, there can be no reformation without such an antecedent agreement.  The equitable doctrine applies when the parties have reached a mutual understanding as to the material terms of a contract, but that mutual understanding is confounded by an error in the form of the written terms of that contract. In this case, A & T makes no effort to identify the terms of its agreement with Brownstone that were not given proper form in the written settlement.

That leads to the second element of reformation, namely, a mistake in the drafting of the agreement such that it does not accurately express the parties’ actual agreement.  In this case, A & T argues that its original agreement contained a mutual mistake of law, in the sense that it and Brownstone did not anticipate the legal consequences of the original settlement agreement as they drafted it. As A & T explains, “Brownstone and A & T believed their original agreement was legally sufficient to seek recovery from Capitol.” That belief turned out to be incorrect, at least as determined by the trial court in the state garnishment proceeding.

In the words of the addendum to the settlement agreement, “the trial court’s decision in favor of Capitol [was] contrary to the settling parties’ intent.”

In Oregon there are two well-defined classes of mistakes common to parties entering into contracts: (1) A mistake in law as to the legal effect of the contract actually made by them; and (2) a mistake in law in reducing to writing the contract, whereby it does not carry out or effectuate the intention of the parties. In the former the contract actually entered into will seldom, if ever, be relieved against. In the second class the mistake is not in the contract, but terms are used or omitted which give the instrument a legal effect not intended by the parties, and different from the contract actually made; and here equity will always grant relief, unless barred on some other ground.

In this case, A & T’s own description of the transaction places it squarely in the category of mistakes for which the equitable remedy of reformation is not available. There is no suggestion that Brownstone and A & T negotiated an agreement that was not accurately or adequately described in the terms of the original settlement. Rather, A & T asserts only that the parties misunderstood the legal consequences of the settlement agreement to which they agreed.

The underlying historical and equitable rationale for reformation is that parties should not be held hostage to a mistake in drafting. In this case, there was no mistake in drafting, only a mistake in predicting how a court at some time in the future would rule on the legal effect of what the parties unquestionably agreed to. Equity, at least as it is exercised under the doctrine of reformation, has no role in remedying the parties’ mistaken prediction of court decisions.

A & T’s theory of reformation does not justify treating the addendum as relating back to the original settlement agreement.

ZALMA OPINION

It is difficult to support multiple efforts in multiple courts in an attempt to cure the poor legal drafting of a release and assignment. This litigation is a model for those who wish the U.S. to adopt the English rule that the losing party must pay all costs incurred by the winner including their reasonable attorneys fees incurred defeating what turned out to be a spurious lawsuit. The plaintiffs are not without a remedy, they can sue their lawyers, and probably should.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Mistake of Legal Effect of Agreement Not Enough to Reform a Contract

Follow Rules or Else!

Tardy & Incomplete Expert Report Stricken

The bane of every expert witness is the client who seeks an expert report shortly before the deadline set by the court. I have been called two hours before the deadline, sometimes a day before, and sometimes a week before. I turn those done because there is just not enough time to read the material and prepare a report even when I keep my case load small to allow me to time to work on cases assigned to me.

In The Phoenix Insurance Company, … and Cantex, Inc., Third Party Plaintiff, v. Scottsdale Insurance Company, and Continental Casualty Company, Third Party Defendants.Slip Copy, 2015 Wl 5864868 (D.Colo. 10/5/2015) Scottsdale Insurance Company fell into the trap of retaining an expert late. Cantex, Inc. (“Cantex”) moved the court to Strike Scottsdale Insurance Company’s Expert Witness Disclosures and the court ruled on the motion.

BACKGROUND

This case arises from disputes between insurers over coverage related to a construction defect case tried in Mohave County, Arizona state court. As pled in Cantex’s third-party Complaint, Cantex sued and obtained judgment against RBR Construction, Inc. (“RBR”) and Concrete Management Corporation (“CMC”) for provision of defective concrete in a construction project (“Underlying Litigation”).  After the judgment, RBR, CMC, and Cantex reached an agreement whereby RBR and CMC assigned their rights under their respective insurance policies at issue in this litigation to Cantex.

Cantex filed its third-party Complaint against Scottsdale Insurance Company (“Scottsdale”), alleging that Scottsdale failed to provide indemnification due on excess insurance policies issued to RBR. Scottsdale Insurance Company (“Scottsdale”) filed a motion to dismiss the third-party breach of contract and bad faith claims asserted by Cantex against Scottsdale.(the “Motion to Dismiss”).

Relevant Expert Disclosures and Cantex’s Motion to Strike

Cantex disclosed Charles Miller (“Mr. Miller”) as an expert witness. Mr. Miller’s expert report focused on whether insurers Continental Insurance Company and Continental Casualty Company (collectively, “CNA”) and Amerisure Insurance Company (“Amerisure”) complied with applicable insurance industry standards in handling claims for insurance coverage by RBR.

Scottsdale served a tardy “Expert Disclosure” designating Allan Windt (“Mr. Windt”) as someone “who may present expert testimony at trial, either in rebuttal or direct. The disclosure stated that Mr. Windt is an expert in “excess insurance,” and would be expected to testify “regarding triggering events and exhaustion of coverage triggering excess coverage.” Scottsdale, although tardy, served its “Supplemental Expert Disclosure,” attaching Mr. Windt’s expert report a month late.

Mr. Windt’s expert report opines that the Scottsdale policy at issue is excess coverage, that excess insurance coverage is not triggered until primary coverage is exhausted, and that RBR’s primary insurance coverage was sufficient to satisfy the judgment entered against RBR in the underlying litigation.

Scottsdale contended that, whether offered as a “rebuttal” witness or “otherwise,” Scottsdale should be permitted to call Mr. Windt to testify to help “explain to a jury the nature of an excess carrier’s obligations given the underlying coverage” involved in this litigation. Finally, in explaining Scottsdale’s belated designation of Mr. Windt and subsequent tardy disclosure of Mr. Windt’s expert report, Scottsdale points to the fact that Scottsdale only recently became obliged to answer Cantex’s third-party Complaint.

ANALYSIS

The determination as to whether a Rule 26(a) violation is justified or harmless is entrusted to the broad discretion of the court. Woodworker’s Supply, Inc. v. Principal Mt. Life Ins. Co., 170 F.3d 985, 993 (10th Cir. 1999). In exercising this discretion, the court’s consideration is guided by the following four factors: (1) the prejudice or surprise to the impacted party; (2) the ability to cure the prejudice; (3) the potential for trial disruption; and (4) the erring party’s bad faith or willfulness.

Application to Motion to Strike

For the purposes of this Motion, the court will assume, without deciding, that Mr. Windt is appropriately designated as a rebuttal, rather than an affirmative, expert. Even as a rebuttal expert, Scottsdale does not and cannot dispute that Mr. Windt’s expert report was not served until a date more than a month after the court-ordered deadline for such disclosures, and just days before the cut-off for all discovery in this action. In responding to Cantex’s Motion to Strike, Scottsdale has not made any effort to explain this course of conduct.

This court has an independent responsibility for case management and the scheduling orders cannot simply be cavalierly disregarded by counsel without peril. The record before the court indicates that Scottsdale was fully aware of the applicable deadlines set by the Scheduling Order as amended in this action. Counsel for Scottsdale appeared at the Rule 16 conference, and participated in the filing of the proposed Scheduling Order. Counsel for Scottsdale was served with a copy of the court’s order extending the expert deadlines.

Instead of seeking any type of relief from the court, Scottsdale simply identified Mr. Windt as an expert, with no report. Then, again without seeking any permission from the court to modify the date for rebuttal expert disclosures pursuant to Rule 16(b), Scottsdale chose simply to provide belated disclosures characterized as a “Supplemental Disclosure.” Rule 26(a)(2)(B) clearly provides that the disclosure of a retained or specially employed expert must be accompanied by a report that sets forth the following:

  1.  a complete statement of all opinions the witness will express and the basis and reasons for them;
  2. the facts or data considered by the witness in forming them;
  3. any exhibits that will be used to summarize or support them;
  4. the witness’s qualifications, including a list of all publications authored in the previous 10 years;
  5. a list of all other cases in which, during the previous 4 years, the witness testified as an expert at trial or by deposition; and
  6. a statement of the compensation to be paid for the study and testimony in the case.

In addition the expert’s written report also must identify the principles and methods on which the expert relied in support of his/her opinions and describe how the expert applied those principles and methods reliably to the facts of the case relevant to the opinions set forth in the written report. There is, and can be, no real dispute that the disclosure made by Scottsdale failed to even attempt to comply with the requirements for expert reports.

Even when Mr. Windt was identified his disclosure still failed to comply with Rule 26(a)(2)(B). In his belatedly served expert report, Mr. Windt states that he “reviewed the documents” on a purportedly “enclosed list.” Scottsdale does not dispute that the list was, in fact, not enclosed or subsequently provided to Cantex. Therefore, the report as propounded is incomplete to the extent Mr. Windt “read, thought about, or relied upon” undisclosed materials in reaching the “conclusions and opinions [ ] expressed” in his report.

Diligence

Scottsdale attempts to shift responsibility for its failure for timely disclosure on two grounds: (1) the opinions of Cantex’s expert, Mr. Miller, are unclear; and (2) the court had not decided its Motion to Dismiss, so it was not yet required to file a responsive pleading at the time of the rebuttal expert deadline. Neither point is well-taken.

Scottsdale concedes that Mr. Windt has issued a report that is independent from what Mr. Miller opined. To the extent that Scottsdale had those opinions to offer, it is unclear how waiting to seek leave from the court to do so, or failing to seek any guidance from the court regarding that disclosure, was appropriate.

Sanctions

In determining the proper sanction for Scottsdale’s untimely and deficient disclosure, the court must consider (1) the prejudice or surprise to the impacted party; (2) the ability to cure the prejudice; (3) the potential for trial disruption; and (4) the erring party’s bad faith or willfulness. Because Scottsdale served Mr. Windt’s expert report just days prior to the already extended discovery cut-off in this action, and because there is no indication in the record that Scottsdale sought to make Mr. Windt readily available for deposition prior to the expiration of the discovery cut-off, the court found that Cantex has suffered prejudice arising from Scottsdale’s tardy disclosure.

More generally, Scottsdale has not sought to explain how its belated disclosures were harmless and substantially justified, instead focusing on the alleged prejudice to Scottsdale if these untimely disclosures were to lead to Mr. Windt’s preclusion. The court was not persuaded.

Based on the foregoing, the court finds that Mr. Windt’s designation and disclosure should be and is stricken.

ZALMA OPINION

Counsel should always retain experts well before the need for the expert witness designation and give the expert the time needed to prepare a report based upon evidence. Counsel for Scottsdale did not serve Mr. Windt well by designating him late, not giving him enough time to prepare a report, submitted his report late, and did not seek assistance from the court because of the inability to submit a full report timely. As a result Mr. Windt, probably through no fault of his own, must bare the embarrassment of having his testimony excluded.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Follow Rules or Else!

Actual Controversy Required for Declaratory Relief

No Cover No Bad Faith

Plaintiffs and their lawyers prefer to sue insurance companies for bad faith because the fear of tort and punitive damages will often cause an insurer to pay a quick settlement of a tort or uninsured/underinsured motorist (UM/UIM) claims. The wise insurer does not fall prey to the attempt and fights the attempt Aggressively.

In Harding v. Safeco Insurance of Illinois, Slip Copy, 2015 WL 5828136 (M.D.Fla., 10/05/2015) the District Court for the Middle District of Florida was called upon to deal with just such a suit where the defendant insurer, Safeco, refused to fall for the ploy and moved to dismiss the parts of the litigation dealing with bad faith.

FACTS

This case arose out of a motor vehicle accident that occurred on August 15, 2014 in Orange County, Florida. At that time, a non-party driver collided with the vehicle being operated by Heidi Harding, in which Dean Harding and Cindy Harding were occupants. As a result of the collision, Plaintiffs suffered bodily injury. At the time of the collision, Plaintiffs were insured by Defendant, Safeco Insurance of Illinois (“Safeco”), under an automobile insurance policy that provided non-stacked underinsured/uninsured motorist (“UM/UIM”) coverage with limits of $300,000.  The non-party at-fault driver had an insurance policy with limits of $10,000. The insurance company for the non-party driver tendered its policy limits of $10,000 to Plaintiffs. Despite this tender, the non-party driver was underinsured for Plaintiffs’ injuries. Plaintiffs made a claim against Safeco to recover UM/UIM benefits under their insurance policy. Safeco refused to pay.

Plaintiffs’ sued, alleging four claims for relief: Count I asserts a claim for UM benefits; Count II asserts a claim for bad-faith; Count III asserts a claim for unfair claim settlement practices; and Count IV seeks a declaratory judgment to determine liability and damages. Safeco moved to dismiss Counts II, III, and IV of Plaintiffs’ Complaint.

DISCUSSION

Bad–Faith and Unfair Claim Settlement Practices

In Counts II and III, Plaintiffs assert a claim for bad-faith and a claim for unfair settlement practices against Safeco. Under Florida law, a claim for bad-faith does not accrue until there has been a determination of liability and damages in the underlying contract claim. A plaintiff who has an as-yet unresolved claim for UM/UIM benefits is not “entitled to relief” on its claim for bad-faith. Moreover, depending on the outcome of the UM/UIM claim, the plaintiff may never be entitled to relief on his or her bad-faith claim. Thus, it is this Court’s position that until a bad-faith claim has a factual basis to support it–i.e., the plaintiff’s claim for UM/UIM benefits has been resolved in the plaintiff’s favor–such a claim is premature.

Plaintiffs’ claim for unfair settlement practices (Count III) also had to be dismissed on the same grounds. If there is no insurance coverage, nor any loss or injury for which the insurer is contractually obligated to indemnify, the insurer cannot have acted in bad faith in refusing to settle the claim. Similarly, if there is no coverage, then the insured would suffer no damages resulting from its insurer’s unfair settlement practices.

Declaratory Judgment

In Count IV, Plaintiffs request that the Court enter a declaratory judgment determining liability and the total amount of damages suffered by Plaintiffs. Plaintiffs seek this declaratory judgment to avoid re-litigating the issue of liability and damages in their bad-faith claim. Safeco argues that Plaintiffs’ claim for declaratory judgment must be dismissed because no actual controversy exists.

The Court evaluated Plaintiffs’ declaratory relief claim pursuant to the Declaratory Judgment Act. To succeed, the controversy must not be conjectural, hypothetical, or contingent; it must be real and immediate, and create a definite, rather than speculative threat of future injury.

The Court has previously determined that Plaintiffs’ bad faith claim should be dismissed without prejudice as it is premature at this time. Moreover, a majority of courts dismiss similar declaratory judgment claims because no actual controversy exists prior to the determination of the damages suffered in the claim for UM benefits.

Here, the determination of liability and the total amount of damages suffered in the underlying contract claim have not been determined. Thus, as it now stands, there is no actual and definite controversy as the Declaratory Judgment Act does not permit a present attempt to quantify an amount of damages for a future bad faith claim because such a declaration does not resolve the entire controversy of whether bad faith occurred.

ZALMA OPINION

The Florida District Court, with intelligence and common sense, refused to allow the plaintiffs to force a UM/UIM insurer to litigate a claim of bad faith before the UM/UIM claim was resolved. The UM/UIM case remains and if Safeco’s position is upheld there is no possibility of a tot of bad faith claim. The attempt at extortion failed.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Actual Controversy Required for Declaratory Relief

$40 Million Bad Bet

The Insurance Version of a Bird In Hand Is Better than $40 Million in the Bush

When an insurer refuses to defend or indemnify its insured the insured is left to defend itself. The ability to recover tort and punitive damages from an insurer raise a temptation of the parties to take an assignment from the defendant of its right to sue the insurer and give up the opportunity to collect from the defendant. In Bond Safeguard Ins. Co. v. National Union Fire Ins. Co. of Pittsburgh, Pa., — Fed.Appx. —-, 2015 WL 5781002 (C.A.11 (Fla.) 10/05/2015) an insurance company, Bond Safeguard Insurance Company and Lexon Insurance Company (collectively, “Bond–Lexon”) fell prey to the temptation, gave up the right to recover more than $40 million from a defendant who had personally guaranteed the debt, and sued the insurer who had refused to defend or indemnify the defendant. After the trial court granted summary judgment Bond-Lexon appealed the district court’s grant of summary judgment in favor of National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) on their declaratory judgment claim to the Eleventh Circuit.

BACKGROUND

This appeal involves an insurance coverage dispute involving a Policy issued by National Union to Land Resource, LLC and its subsidiaries (collectively, “LRC” or “the insured LRC”). The issue is whether a contractual-liability exclusion in the Policy applies to a lawsuit brought by Bond–Lexon against the insured LRC and the subsequent judgment Bond–Lexon obtained against the insured LRC.

The Policy

LRC and its subsidiaries were real estate development companies that contracted with municipalities to develop residential subdivisions in Georgia, Tennessee, and North Carolina. Robert Ward was LRC’s chief executive officer and primary owner.

During the times relevant to this appeal, Ward and LRC had insurance coverage under a Directors, Officers, and Private Company Liability Insurance Policy (the “Policy”) issued by National Union. Under the Policy, National Union agreed to provide coverage for the policy period of March 31, 2008, to March 31, 2009, as follows: “This policy shall pay the Loss of each and every Director, Officer or Employee of the Company arising from a Claim first made against such Insureds during the Policy Period or the Discovery Period (if applicable) … for any actual or alleged Wrongful Act in their respective capacities as Directors, Officers or Employees of the Company.”

National Union’s Policy thus covered losses of LRC’s Ward arising from claims made against him for any “wrongful acts” in his capacity as a director, officer, or employee of LRC.

The Policy also contains various exclusions limiting National Union’s coverage obligations. Relevant to this appeal, Exclusion 4(h) provides that National Union “shall not be liable to make any payment for Loss in connection with a Claim made against an Insured [Ward] … alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the Company or any other Insured under any express contract or agreement ” (emphasis added).

The Surety Bonds

As a developer, LRC arranged for the design and construction of subdivision improvements such as roads and utilities. The municipalities in which the subdivisions were located required LRC to obtain surety bonds to guarantee performance of LRC. LRC’s failure to complete the improvements as required would constitute a breach of the development contracts with the municipalities.

Bond–Lexon, the plaintiff here, is in the business of issuing surety bonds, including subdivision bonds. Beginning in 2003, Bond–Lexon issued subdivision bonds on behalf of LRC as principal. The bonds, which imposed obligations on Bond–Lexon as surety and LRC as principal, served to guarantee LRC’s timely completion of the subdivision improvements. If LRC defaulted, the bonds required Bond–Lexon to complete the improvements or pay the municipalities the principal amounts of the bonds.

As a prerequisite to issuing any bonds, Bond–Lexon required Ward and LRC to execute a General Agreement of Indemnity (“GAI”). On August 12, 2003, Ward signed the GAI individually and on behalf of LRC. By the summer of 2008, LRC had stopped making progress on the subdivision improvements covered by the bonds.

In October 2008, LRC filed a voluntary Chapter 11 bankruptcy petition, which was later converted to Chapter 7.

Underlying Action and Settlement Agreement

On April 19, 2011, Bond–Lexon filed a two-count complaint in the U.S. District Court for the Middle District of Florida against Ward and other directors and officers of LRC, seeking damages suffered as a result of LRC’s defaults on the projects covered by its development contracts.

After receipt of Bond–Lexon’s initial complaint, Ward demanded coverage from National Union under the Policy. On July 14, 2011, National Union denied Ward’s demand for coverage by virtue of Exclusion 4(h), maintaining that Bond–Lexon’s claims arose out of LRC’s and Ward’s contract liability, and, therefore, fell into the exclusion.

Meanwhile, the parties negotiated a global settlement in LRC’s bankruptcy proceeding. As part of this settlement, Ward assigned to Bond–Lexon his rights to assert any claims against National Union with respect to the Policy and the coverage denials under the Policy. Ward stipulated to a $40,410,729 judgment in favor of Bond–Lexon. In return, Bond–Lexon agreed not to seek to collect this judgment from Ward.

On December 12, 2012, Bond–Lexon filed its second amended complaint and Ward demanded coverage from National Union for the damages alleged in Bond–Lexon’s second amended complaint. National Union denied Ward’s demand for coverage based on Exclusion 4(h) of the Policy. On January 29, 2013, the district court entered a stipulated final judgment for Bond–Lexon against Ward in the amount of $40,410,729. T

Insurance Coverage Dispute with National Union

Bond–Lexon, as Ward’s assignee, then sued National Union for breach of the Policy. Bond–Lexon’s complaint sought a declaratory judgment that Bond–Lexon was entitled to full coverage under the Policy.

The district court granted National Union’s motion for summary judgment. The district court concluded that this phrase in Exclusion 4(h)—“arising out of, based upon or attributable to any … contractual liability”— was unambiguously broad so as to preclude coverage for tort claims that depended on the existence of the insured’s contractual liability under any express contract or agreement. The district court found that Bond–Lexon’s claim depended on—and was not merely incidental to—the contractual liability of Ward and LRC under the GAI, the bonds, and various development contracts.

DISCUSSION

To recover, Bond–Lexon must show that (1) National Union wrongfully refused to defend Ward in the underlying action brought by Bond–Lexon against Ward, (2) National Union had a duty under the Policy to indemnify Ward for the $40,410,729 judgment, and (3) the settlement between Bond–Lexon and Ward was reasonable and made in good faith.

In contrast to the duty to defend, the insurer’s duty to indemnify is determined by the actual facts of the underlying case rather than only the facts and legal theories alleged in the complaint. And the duty to indemnify arises only when the Policy covers the relevant claim against the insured Ward. The parties’ primary dispute on appeal is whether Exclusion 4(h) precludes coverage for Bond–Lexon’s lawsuit resulting in the $40,410,729 judgment against Ward.

Exclusion 4(h) Applies

According to Bond–Lexon, Ward’s negligent misrepresentations induced Bond–Lexon to issue the subdivision bonds and to rely on the GAI as adequate security. Bond–Lexon argues that its claim for fraudulent inducement sounded wholly in tort and not contract, and arose out of Ward’s misrepresentations that necessarily predated the bonds, rather than any subsequent contractual liability of Ward or LRC. Bond–Lexon therefore contends that coverage was not barred by Exclusion 4(h) in Ward’s Policy.

The premise of Bond–Lexon’s claim is that Ward is liable for the losses and expenses Bond–Lexon incurred in settling the municipalities’ claims on its bonds because it was Ward’s negligence that caused LRC and Ward to default on LRC’s contractual obligations to the municipalities in 2008. According to the second amended complaint, Ward’s alleged negligence included hiring incompetent architects to design the improvements, improperly supervising retained professionals and contractors, failing to budget for the payment of architectural services, and concealing LRC’s increasingly dire financial situation. This alleged negligence primarily occurred during the course of LRC’s performance under the development contracts with the municipalities.

Bond–Lexon’s pleading of its claim in tort does not alter the fact that all of its asserted losses arose from the Ward’s and LRC’s contractual breaches of the development contracts and the GAI. The plain language of Exclusion 4(h) does not limit its applicability to loss in connection with only contract claims. Given the Florida Supreme Court’s broad interpretation of the unambiguous phase “arising out of,” the Eleventh Circuit found a sufficient causal connection between Bond–Lexon’s purported negligence claim and the contractual liability of Ward and LRC to enforce the exclusion according to its terms.

Stated another way, under the particulars of this case, the alleged negligence and misrepresentations, which form the basis of the tort claim, had a clear nexus with the development contracts, and the tort claim is inextricably intertwined with the circumstances surrounding the development contracts, plus the resolution of the tort claim requires consideration of the losses and duties under the development contracts.

Because Exclusion 4(h) clearly applied to Bond–Lexon’s claim against Ward, National Union had no duty to indemnify Ward for the value of his settlement with Bond–Lexon.

ZALMA OPINION

The individuals sued by Bond-Lexon did not file bankruptcy. I can only assume they took the assignment because they believed they had no potential to recover any part of the $40 million from the individual guarantors. They took a bet on $40 million and recovered nothing where they might have collected more from the individuals since a competent surety would investigate the assets of the guarantors before entering into a surety bond.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on $40 Million Bad Bet

Court Rules in part in Favor of Defendant Who Defaulted

Pre-Existing Condition or Waiting Period Exclusion

In common use allowing a default to be entered against a defendant is tantamount to admitting that the allegations of the complaint are true. However, courts have discretion to review the facts and rule contrary to the implied admissions if justice requires.

HCC Life Insurance Company asked the District Court for the District of Colorado to enter judgment against Patrick McGoldrick, requesting an order declaring that its Short Term Major Medical Insurance Policy issued to Defendant excludes coverage for metastatic melanoma in his right leg.  In HCC Life Insurance Company v. Patrick Mcgoldrick, Slip Copy, 2015 WL 5834765 (D.Colo., 10/07/2015) the court ruled on the request for default judgment.

PROCEDURAL BACKGROUND

On May 20, 2015, Plaintiff filed a Complaint for Declaratory Judgment, seeking an order from this Court declaring that Plaintiff has no duty to provide payment for Defendant’s treatment related to the diagnosis of metastatic melanoma. Defendant was properly served but filed no answer or other response.  Upon the insurer’s Motion for Entry of Default filed June 12, 2015, the Clerk of the Court entered default against Defendant.

LEGAL STANDARD

Default judgment may be entered against a party who fails to appear or otherwise defend a lawsuit. Default judgment must normally be viewed as available only when the adversary process has been halted because of an essentially unresponsive party. In that instance, the diligent party must be protected lest he be faced with interminable delay and continued uncertainty as to his rights. The default judgment remedy serves as such a protection. Even after entry of default, however, it remains for the court to consider whether the unchallenged facts constitute a legitimate basis for the entry of a judgment.

FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ANALYSIS

On or about June 23, 2014, Defendant submitted an application to Plaintiff for a Short Term Major Medical Insurance Policy. The application asked Defendant if “Within the last 5 years has any applicant been diagnosed, treated, or taken medication for or experienced signs or symptoms of any of the following: cancer or tumor. Defendant answered “no” to that question.

Thereafter, Plaintiff issued Defendant a Short Term Major Medical Insurance Policy, for a six month term, from June 24, 2014 to December 23, 2014, with liability policy limits of $2,000,000 (the “Policy”). On June 27, 2014, within three days of the effective date of the Policy, Defendant met with his primary care provider, Joshua Crider, P.A. with Banner Health, to evaluate a skin lesion on his right leg. The “skin lesion began one year” before his appointment; Defendant had suffered throbbing right inner thigh pain for the prior three months; Defendant had been wrapping the lesion on a daily basis because it would bleed; In January 2014, the lesion had been the size of quarter but was now much larger; Defendant had a swollen lymph node in his right groin and a gland in his right hip that had been swelling for the previous three months; and  Mr. Crider diagnosed Defendant with “leg melanoma” and associated lymphadenopathy.

Exclusions, paragraph 1 of the Policy excludes “pre-existing conditions” from coverage. The exclusion provides, in relevant part: “Charges resulting directly or indirectly from a condition for which a Covered Person received medical treatment, diagnosis, care or advice within the twelve (12) month period immediately preceding such person’s Effective Date are excluded from coverage hereunder.”

Plaintiff denied Defendant’s claim based on the pre-existing condition and waiting period exclusions under the Policy.

Conclusions of Law and Analysis

The Policy states that it is to be governed by the laws of Missouri. The general rules for interpretation of contracts apply to insurance contracts

First, based on the clear and unambiguous language, the waiting period exclusion that provided: ““If coverage was purchased within 3 days of the Covered Person’s Effective Date, then in respect to Sickness, Covered Persons will only be entitled to receive benefits for Sicknesses that begin, by occurrence of symptoms and/or receipt of treatment, at least 72 hours following the Covered Person’s Effective Date of coverage under the policy”  (emphasis added) applies.

Specifically, the Policy was purchased June 23, 2014 within 3 days of the effective date June 24, 2014 Defendant’s “sickness” did not begin “by occurrence of symptoms and/or receipt of treatment, at least 72 hours following” the effective date of June 24, 2014. Instead, his sickness was present during, and began well before, the waiting period. Defendant noticed problems with his “skin lesion” at least a year before June 24, 2014; noticed his lesion had grown since January 2014 and was aware since then that he should see a doctor but put it off; had been wrapping his lesion because it would bleed; and noticed swelling in his right groin area in March/April 2014. As such, Defendant’s symptoms of metastatic melanoma were present during the Policy’s waiting period; therefore, coverage is precluded for all medical claims incurred as a result of treatment related to the diagnosis of metastatic melanoma.

The Court’s conclusion, however, is to the contrary as to the pre-existing condition exclusion. Under that exclusion, coverage is excluded for “[c]harges resulting directly or indirectly from a condition” for which Defendant “received medical treatment, diagnosis, care or advice within the twelve (12) month period immediately preceding” the effective date, June 24, 2014. Plaintiff provides no such evidence. Instead, the record shows that, during the relevant time period, Defendant was aware that he had a medical issue but he did not seek – or receive – medical treatment, diagnosis, care or advice. Accordingly, the pre-existing condition exclusion does not preclude coverage for the claim at issue.

In summary, Plaintiff’s Motion based on the pre-existing condition exclusion is denied, but its Motion based on the waiting period exclusion is granted.

ZALMA OPINION

The court gave McGoldrick a pyhric victory. No coverage because the pre-existing condition exclusion required actual treatment of the disease to be pre-existing so the exclusion – poorly written – did not apply but since the waiting period exclusion applied because it included in its provision the existence of symptoms or treatment which should have been in the pre-existing exclusion. Insurance requires fortuity. McGoldrick was sick before he bought the policy and he knew it and tried to defraud his insurer by buying insurance before going to see his doctor for treatment.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Court Rules in part in Favor of Defendant Who Defaulted

McCarran-Ferguson Act Prohibits RICO Action Against Insurer

Lack of Privity Prevents Adjuster From Being Sued For Bad Faith

Plaintiff The William Powell Company (“Powell”), an Ohio corporation, has manufactured industrial valves since at least 1846. It attempted to make a RICO action into a bad faith case because the state of Ohio has no tort of bad faith and because of a convoluted conversion of insurance obligations of the insurers and mergers in the 22 year period for which coverage was sought.

FACTS

During the period from 1955 to 1977, Powell purchased a series of primary and excess product and general liability insurance policies from General Accident Fire & Life Assurance Corporation (“General Accident”). According to the complaint, these insurance policies required General Accident to defend and indemnify Powell against damages resulting from accidents resulting in bodily injury. Powell alleges that these policies cumulatively provide coverage for up to $60 million in claims, not including the costs of defense. Powell estimates that, including defense costs, the policies have a value of as much as $180 million.

Beginning in 2001, numerous individual plaintiffs began to sue Powell for asbestos-related injuries that allegedly were caused by asbestos in Powell valves. Powell claims to have been sued by asbestos plaintiffs in 37 states and Canada. As a result of these lawsuits, Powell began to piece together its insurance coverages. Powell learned that, through a series of corporate mergers and asset sales, the policies it purchased from General Accident were eventually assumed by Defendant OneBeacon Insurance Company (“OneBeacon”). OneBeacon is alleged to be a Pennsylvania corporation with its principal place of business in Boston, Massachusetts.

OneBeacon, in turn entered into a reinsurance agreement with Defendant National Indemnity Company (“NICO”). NICO is alleged to be a Nebraska corporation that is wholly-owned by Berkshire Hathaway, Inc. This was not a typical reinsurance agreement according to the complaint, however. Instead of prospectively agreeing to indemnify OneBeacon against claims, the complaint alleges that NICO purchased OneBeacon’s claims reserves for $2.5 billion and then agreed to reimburse OneBeacon for claims and defense costs up to $2.5 billion.

NICO also acquired responsibility for handling and adjusting all of OneBeacon’s claims. NICO, however, delegated its claims handling responsibilities to Ken Randall America (“Ken Randall”) and then to Cavell America (“Cavell”). In 2006, NICO delegated claims handling to Defendant Resolute Management, Inc., a Delaware corporation (“Resolute”). Resolute is also wholly-owned by Berkshire Hathaway.

The complaint alleges that NICO and Resolute combined to form a racketeering enterprise for the purpose of depriving Powell of its insurance coverage and to profit at Powell’s expense. Additionally, NICO allegedly sets limits on the amount of claims payments Resolute can make based on its own financial goals rather than on the value of policyholders’ claims. Stated another way, the complaint alleges that NICO does not want to pay out the claims reserves it bought from OneBeacon and uses Resolute to hinder, delay, and frustrate payment of legitimate claims from policyholders. Among other things, Powell alleges that:

  1. Resolute began to delay payments to local defense counsel and to fund settlements;
  2. Resolute attempted to curtail local defense counsel’s activities and changed Powell’s national coordinating counsel without consulting Powell;
  3. Resolute began increasing the rates and amounts of settlements in order to curtail, reduce, and exhaust Powell’s policy limits;
  4. Resolute disputed the terms and limits of Powell’s coverages under the policies;
  5. Resolute rejected numerous suggestions from Powell for improving the defense of its cases in order not to reduce the float;
  6. Resolute limited local defense counsel’s ability to investigate exposure dates;
  7. Resolute failed to timely notify Powell of coverage decisions;
  8. Resolute unilaterally made decisions that impaired Powell’s defense;
  9. Resolute unilaterally authorized settlements;
  10. Resolute failed to keep Powell apprised of settlement developments; and
  11. Resolute refused to fund settlements and to pay the invoices of local defense counsel.

Powell alleges that NICO and Resolute carried out this racketeering enterprise through predicate acts of wire fraud involving material misrepresentations and omissions. Powell also alleges that NICO, Resolute, and OneBeacon have breached their duty to process its claims in good faith. Powell further alleges that OneBeacon breached the various insurance agreements and that, by their conduct, NICO and Resolute tortiously interfered with Powell’s insurance contracts.

OneBeacon, NICO and Resolute have each filed motions to dismiss Powell’s complaint, or in the alternative, to stay this case pending the resolution certain state court matters involving OneBeacon and Powell.  Defendants also argue that Powell’s complaint fails to state claims for relief and assert a number of different grounds to support dismissal of the complaint. In The William Powell Co. v. National Indemnity Co., et al., Additional Party, Names: Resolute Management, Inc., Slip Copy, 2015 WL 5729381 (S.D.Ohio, 9/30/2015) the District Court for the Southern District of Ohio was asked to eliminate from the suit those entities not in privity to the insurance contract.

ANALYSIS

Count I of the complaint alleges that NICO and Resolute conducted the affairs of an enterprise through a pattern of racketeering activity in violation of RICO. Specifically, Powell alleges that NICO and Resolute committed predicate acts of wire fraud in violation of 18 U.S.C. § 1343 in depriving or attempting to deprive it of the value of its insurance policies. NICO and Resolute advance a number of reasons why the complaint fails to state a claim for a RICO violation. Their principal argument, however, is that the McCarran-Ferguson Act preempts Powell’s RICO claim because it would interfere with state insurance laws.

The McCarran-Ferguson Act embodies the concept of “reverse preemption” in the field of insurance in which a state law relating to insurance will preempt and take precedence over a conflicting federal law that does not itself relate to insurance. Riverview Health Inst. LLC v. Medical Mut. of Ohio, 601 F.3d 505, 513-14 (6th Cir. 2010).

Determining whether the McCarran-Ferguson Act reverse preempts a federal statute is a three-step process. First, the court must determine whether the federal statute at issue relates specifically to the business of insurance. If it does, then the McCarran -Ferguson Act does not apply. Second, the court must determine whether the state law at issue was enacted for the purpose of regulating the business of insurance. If the state law was not enacted for the purpose of regulating the business of insurance, then reverse preemption does not apply. Third, the court must determine whether application of the federal statute would invalidate, supersede or impair the state statute. If application of the federal statute would not invalidate, supersede or impair the state statute, then reverse preemption does not apply.

In support of its reverse preemption argument, NICO and Resolute point out that: 1) RICO does not specifically relate to the business of insurance; 2) Ohio has enacted a complex statutory and administrative scheme to regulate unfair insurance practices, including unfair claims handling; and 3) because Ohio does not provide a private cause of action to insureds for unfair insurance practices, a statute like RICO, which permits recovery of treble damages against the defendant in the event of a violation, would invalidate, impair or supersede Ohio’s ability to regulate the business of insurance.

Ohio law does not provide a private cause of action to insureds against insurance companies or their claims administrators for committing unfair insurance practices.
Ohio courts have specifically noted that a bad faith claim arises out of the contractual relationship between the insurer and the insured and have consistently rejected bad faith claims where the parties are not in privity with each other.

The absence of a state law claim indicates that allowing Powell’s RICO cause of action to proceed would impair or impede state insurance law. No other state statute would provide a basis for a state suit against NICO and Resolute to redress the alleged wrongful claims handling practices, nor has Powell identified an alternative statute. Since state law does not provide any cause of action, state awards of punitive damages are not available to Powell. For the same reason, an award of treble damages under RICO would exceed the damages available to Powell under state law -none. These factors all indicate that RICO would impair, invalidate or supersede Ohio’s insurance regulatory scheme. Third, as indicated by NICO and Resolute, the State of Ohio has taken the position that a RICO claim to redress alleged unfair and deceptive claims handling practices would upset and impair its regulatory scheme and impede its ability to detect insurance fraud. Fourth and finally, there is no suggestion in the record that insurance companies in Ohio rely on federal RICO to combat insurance fraud.

Here, all of the factors discussed above strongly indicate that Powell’s RICO claim would impair, invalidate or supersede state insurance law. Therefore, Powell’s RICO claim is reverse preempted by the McCarran-Ferguson Act. Accordingly, NICO and Resolute are entitled to dismissal of Powell’s RICO claim against them.

BAD FAITH

Powell claims that NICO and Resolute handled its insurance claims in bad faith. Ohio does not provide a claim  based on the bad faith handling of insurance claims where the parties are not in privity with each other.

TORTIOUS INTERFERENCE WITH CONTRACT

Finally, Powell alleges that by their actions in denying coverage of claims, impairing its ability to defend against claims, and failing to pay settlements and costs, NICO and Resolute caused OneBeacon to breach its obligations under the various insurance policies and thereby tortiously interfered with its insurance contracts with OneBeacon. Tortious interference with contract occurs when the defendant intentionally and improperly causes or induces a third person not to perform his obligations to the plaintiff under the contract

An agent can be liable for tortiously interfering with the principal’s contract only if he acted and benefitted from the alleged interference solely in his individual capacity.

Since the complaint indicates that NICO and Resolute’s alleged wrongful acts were within the scope of their agency with OneBeacon, it is immaterial, in the Court’s opinion, that Powell also alleges that they allegedly were motivated solely by their own self-interest to cause OneBeacon to breach the insurance agreements.

ZALMA OPINION

RICO is a federal statute to defeat racketeering not bad faith insurance claims handling. Since insurance is special and by statute the regulation of insurance is limited to the states, this action failed.  The McCarran-Ferguson Act protected the insurers and lack of privity protected the insurance adjusters.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on McCarran-Ferguson Act Prohibits RICO Action Against Insurer

Insured Must Rebuild to Collect Holdback

Actual Cash Value Limit Unless Insured Actually Replaces

Plaintiff Robert Lytle challenges the trial court’s dismissal of his second amended complaint alleging breach of contract and seeking costs and penalties against defendant Country Mutual Insurance Company (Country Mutual). The trial court found that there was no genuine issue of material fact and the clear and unambiguous terms of the insurance policy established that Lytle was not entitled to replacement costs because he never made any repairs or replacements. In Lytle v. Country Mut. Ins. Co.,— N.E.3d —-, 2015 IL App (1st) 142169, 2015 WL 5734914 (Ill.App. 1 Dist., 9/30/2015) the Illinois Court of Appeal was asked to resolve the dispute.

BACKGROUND

In February 2011, plaintiff Lytle purchased a homeowner’s insurance policy from defendant Country Mutual to insure his home in Elmhurst, Illinois. The home was built around 1903. On June 21, 2011, Lytle discovered damage to his home as a result of a severe storm and shortly thereafter made a claim to Country Mutual for insurance proceeds.

The policy contained a depreciation holdback provision, which provided that the insurer would not pay more than actual cash value until the actual repair or replacement was complete. Furthermore, the insured could choose to accept actual cash value instead of replacement cost. If the insured elected to accept actual cash value, he would have one year from the date of the loss to repair or replace the damaged property and request the difference between the actual cash value and the replacement cost.

Lytle hired an insurance adjuster to represent him in the claims process. Country Mutual informed Lytle’s adjuster that Country Mutual’s adjuster did not have authority to make any verbal agreements or commitments on behalf of Country Mutual, all agreements must be in writing, and Country Mutual would not waive any of the policy requirements concerning the insured’s duties.

Country Mutual issued to Lytle an actual cash value payment of $42,911.84. Country Mutual sent Lytle a letter advising him that his claim remained open; Country Mutual was waiting—in accordance with the depreciation holdback provision of the policy—for the work to be completed; and Lytle’s one-year date to replace or repair the damaged property and request the difference between actual cash value and replacement cost would expire on a date specified in the letter. Two months later Country Mutual sent Lytle another letter containing the same information.

Lytle’s adjuster negotiated with Country Mutual to increase the amount of the actual cash value payment to include damage to the foundation. The parties reached an agreement on this matter and Country Mutual issued Lytle a supplemental actual cash value payment of $16,024.70.

On June 11, 2012, Country Mutual wrote Lytle, informing him that it could not grant an extension on his claim and his one year period in which to complete the repairs would expire on June 21, 2012.

Country Mutual denied Lytle’s request for additional payment of the depreciation holdback, and Lytle filed suit. In his second amended complaint, Lytle sought damages, alleging Country Mutual breached the insurance contract by failing to pay the replacement costs and additional living expenses.

Country Mutual moved for summary judgment and argued that there was no genuine issue of material fact to be determined because Country Mutual paid Lytle his actual cash value payment; the policy provided that Lytle had one year to complete the property repairs and request the difference between the actual cash value paid and the replacement costs necessary to repair the storm damage; and Lytle did not complete any repairs or replacements within the one year period.

On June 11, 2014, the trial court held a hearing on Country Mutual’s motion and granted summary judgment in favor of Country Mutual. The court found that Lytle’s request for an appraisal related solely to a dispute over coverage, which was not subject to the appraisal provision of the policy. The court also found that Lytle had negotiated a settlement of the actual cash value payment, failed to timely complete repairs or replacements, and did not incur any building code upgrade costs. Lytle timely appealed.

ANALYSIS

A reviewing court’s function in reviewing a trial court’s entry of summary judgment is to ensure that no genuine issue of material fact was raised and to determine whether the judgment was correctly entered as a matter of law.

After a detailed review of the policy wording the court found no ambiguity in this contract language, and has construed similar contract language and found the policy clear and unambiguous. Saathoff v. Country Mutual Insurance Co., 379 Ill.App.3d 398, 404 (2008); Higginbotham v. American Family Insurance Co., 143 Ill.App.3d 398, 400 (1986); National Tea Co. v. Commerce & Industry Insurance Co., 119 Ill.App.3d 195, 201 (1983). Therefore, the trial court correctly interpreted the clear language of the insurance policy as providing for replacement cost coverage only if actual repairs were completed.
The Replacement Cost provision of the policy has two components: the Actual Cash Value, which is the value of the property at the time of loss, or an agreed or appraised value; and the Depreciation Holdback, which is the cost of repairs that exceed the Actual Cash Value. If the insured repairs or replaces the damaged property, and if the actual cost of repairs exceeds the actual cash value, then the insurer is obligated to reimburse the insured for the difference.

Here, it is undisputed that Lytle has been paid the actual cash value of the damaged property at the time of the loss and has not repaired or replaced the property. Moreover, it is undisputed that the policy contains a standard depreciation holdback loss settlement provision that states Country Mutual will not pay more than actual cash value until the actual repair or replacement is complete. Accordingly, Lytle is not entitled to reimbursement for the depreciation holdback because he did not incur that pecuniary loss.

Lytle also contends Country Mutual violated the policy by failing to comply with his demand for an appraisal. Lytle argues that he sought an appraisal over a disputed amount of a covered loss.

Contrary to Lytle’s assertion on appeal, he presents this court with a coverage dispute rather than a dispute over the amount of a loss. Specifically, Lytle disputes whether certain costs associated with complying with building ordinances would be covered under his policy. Consequently, Lytle was not entitled to an appraisal on the issue of insurance coverage or contract interpretation. According to the record, the trial court determined that the issue raised in Lytle’s appraisal request was not subject to the appraisal provision. The insurance policy at issue provides coverage only for incurred costs, and the equitable principles of waiver and estoppel may not be used to create or extend coverage where none exists.

ZALMA OPINION

The insured and the public adjuster obtained the full actual cash value loss with little difficulty. Because of problems with the local government the insured was unable to rebuild.  He attempted to overcome the twelve month requirement by demanding appraisal to resolve coverage issues but that didn’t work because appraisal is limited to the amount of loss, a fact that was not disputed. Since the insured did not comply with the condition he could not collect the hold back.

ZALMA-INS-CONSULT                      © 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Insured Must Rebuild to Collect Holdback

Lie to Your Insurer at Your Risk

Material Misrepresentation Voids Coverage

Ernest Warren Farr, Jr. (Warren) and Debbie Holmes (Debbie) entered into an insurance contract with American National Property and Casualty Company (ANPAC) to insure a pontoon boat and trailer. Debbie and Warren later submitted a claim for insurance coverage after the boat and trailer were allegedly stolen. ANPAC denied coverage for the loss and rescinded the policy after discovering that Warren and Debbie were not the owners of the boat and had made misrepresentations on the insurance application.

Warren and Debbie, along with the boat’s owner, Jo Ann Farr, brought a complaint against ANPAC for breach of the insurance contract, alleging that ANPAC had acted in bad faith and should be ordered to cover the loss. The trial court subsequently granted summary judgment for ANPAC. Warren and Debbie appealed.

In Farr v. American National Property and Casualty Company, Not Reported in S.W.3d, 2015 Ark. App. 534, 2015 WL 5770088 (Ark.App. 9/30/2015) the Arkansas court of appeal was asked to resolve the dispute.

FACTS

Jo Ann Farr, who is Warren Farr’s mother, purchased the pontoon boat and trailer in 2007. In Debbie’s deposition, she explained that although Jo Ann was the named purchaser and titled owner, the boat essentially belonged to her [Debbie] and Warren and that they were making the payments. Debbie said that both she and Warren had bankruptcies on their credit reports, and that Jo Ann, who had better credit, signed for the boat so they could get a lower interest rate.

On July 23, 2010, Debbie submitted a watercraft insurance application with ANPAC, seeking insurance coverage on the boat and trailer for herself and Warren. One of the questions on the application asked, “Have you or any member of your household ever been convicted of a felony or drug possession?” The application stated, “If yes, do not bind.” The answer given on the application was “no,” when in fact Warren had a prior felony conviction for attempted murder. The application further asked, “Is the applicant the original owner of this watercraft?” The answer given to that question on the application was “yes.”  Just below the signature was a statement warning that a misrepresentation on the application would allow the insurer to void the policy.

After the application was submitted, ANPAC issued a watercraft policy naming Warren and Debbie as the insureds.  The policy also contained the following provision: “Concealment or Fraud. This entire policy is void if an insured person has intentionally concealed or misrepresented any material fact or circumstances relating to this insurance, or acted fraudulently or made false statements relating to this insurance.”

Warren and Debbie made a claim for coverage under the policy, claiming that the boat and trailer were stolen on July 24, 2011. After ANPAC denied coverage, Warren and Debbie filed a breach-of-contract action against ANPAC on March 20, 2013, alleging that ANPAC had breached the insurance contract and had also acted in bad faith. On June 16, 2014, ANPAC filed a motion for summary judgment asserting that Debbie had made material misrepresentations in the insurance application.

On July 28, 2014, the trial court entered an order granting ANPAC’s motion for summary judgment and dismissing Warren and Debbie’s complaint with prejudice. The trial court subsequently denied appellants’ motion for reconsideration.

DISCUSSION

The court noted that summary judgment may be granted only when there are no genuine issues of material fact to be litigated, and the moving party is entitled to judgment as a matter of law. Once the moving party has established a prima facie entitlement to summary judgment, the opposing party must meet proof with proof and demonstrate the existence of a material issue of fact.

Warren and Debbie claim that summary judgment was improper under ANPAC’s theory that Debbie had made a material misrepresentation on the insurance application. They rely on Neill v. Nationwide Mutual Fire Insurance Company, 355 Ark. 474, 139 S.W.3d 484 (2003), a case in which the supreme court reversed a summary judgment in favor of the insurance company because, although there had been a misrepresentation made on the insurance application, and the insured signed the application, a material fact remained as to whether the insurance agent had misstated the insured’s response or failed to ask all the questions on the application.

Warren and Debbie argued that even had there been a misrepresentation on the application, ANPAC failed to show that the misrepresentation was material or that it would not have issued the policy had it known the true facts. Citing National Old Line Insurance Company v. People, 256 Ark. 137, 506 S.W.2d 128 (1974), they asserted that it was ANPAC’s burden to show a causal connection between the misrepresentation and the eventual loss, and that in this case the fact that Warren was a convicted felon had no relationship to the boat being stolen.

Warren and Debbie failed to inform the court that National Old Line Insurance Company, supra, cited by them was later overruled by our supreme court in Southern Farm Bureau Life Insurance Company v. Cowger, 295 Ark. 250, 748 S.W.2d 332 (1988). In Southern Farm Bureau, the supreme court held that an insurer may defend on the ground that a misrepresentation caused issuance of the policy, though the fact misrepresented was not necessarily related to the loss sustained. Therefore, contrary to appellants’ argument herein, ANPAC did not have to show a causal connection between the misrepresentation and the eventual loss.

In the absence of a statutory provision to the contrary, Arkansas follows the general common-law rule that a material misrepresentation made on an application for an insurance policy and relied on by the insurance company will void the policy. The materiality of the misrepresentation goes to whether or not the insurer, with knowledge of the true facts, would have accepted the risk and issued the policy.

In this case the insurance application, signed by Debbie, falsely contained a “no” answer to whether any member of her household had ever been convicted of a felony. Next to that question the application contains the instruction, “If Yes, do not bind.”  From the language in the application providing that coverage should not be bound if the answer was “yes,” the court of appeal concluded that ANPAC established that it would not have accepted the risk and issued the policy had it known about Warren’s prior felony.

With respect to appellants’ claim that the insurance agent never asked Debbie the question during the application process, the court of appeal concluded that Debbie’s deposition does not raise a factual question on that issue or lend support to that claim. In Debbie’s deposition she was asked if she remembered the agent asking the question about prior felony convictions, and she responded, “I don’t recall.” She did not deny that she was asked the question. Debbie proceeded to testify that, despite being given the opportunity to do so, she did not read the application line by line before signing it, stating that “I don’t think anybody does that.”

In Neill, supra, the supreme court stated the general rule that, if a person signs a document, she is bound under the law to know the contents of the document. One who signs a contract, after an opportunity to examine it, cannot be heard to say that she did not know what it contained.

Debbie signed the application containing the material misrepresentation, and there is no proof in the record to support Debbie and Warren’s claim that her misstatement was the result of fraud, negligence, or mistake by ANPAC’s agent. The material misrepresentation, relied upon by the insurance company in issuing the policy, voided the policy and relieved ANPAC from coverage. Therefore, ANPAC was entitled to judgment as a matter of law with respect to appellants’ breach-of-contract claim.

ZALMA OPINION

It is not nice to lie to your insurance company. It is totally wrong to lie to an insurer or defraud a lender. Debbie and Warren seemed to have no trouble defrauding both the lender, by buying the vessel in mother’s name because they did not have a good credit rating, and defrauding the insurer about the ownership of the vessel and the fact that Warren had a felony conviction, both of which would have resulted in a refusal of insurance. Fraud in the inception of an insurance policy allows, even requires, an insurer to rescind the policy.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Lie to Your Insurer at Your Risk

Materiality Needed to Rescind a Policy

Question of Fact Defeats Summary Judgment

Misrepresentation of a material fact in an application for insurance, knowingly made, is sufficient in most states to rescind a policy of insurance. In states that apply the “Marine Rule” like California, a misrepresentation of a material fact, even if innocently made, is sufficient to rescind because the insurer was deceived.

To effect a rescission in Connecticut, the insurer must prove (1) a misrepresentation (or untrue statement) by the plaintiff which was (2) knowingly made and (3) material to the insurer’s decision whether to insure. In Principal National Life Insurance Company v. Emily C. Coassin and Thomas Gibney as Co-Trustees of the Lawrence P. Coassin Irrevocable Trust dated 6/23/1999, Slip Copy, 2015 WL 5680320 (D.Conn., 9/25/2015) the District Court for the District of Connecticut was faced with an insurer’s attempt to rescind a $10 million life insurance policy because the insured lied in the application and to a supplemental questionnaire submitted by the insured.

Principal National Life Insurance Company (“Principal”) sued Emily C. Coassin and Thomas Gibney in their capacities as Co-Trustees of the Lawrence P. Coassin Irrevocable Trust dated 6/23/1999 (“the Trustees”), for rescission of the life insurance policy (“the policy”) Principal issued to Larry Coassin and for a declaratory judgment that the Policy is void ab initio and Principal is not liable to pay benefits under it. Defendants counterclaim for a declaratory judgment that Principal is liable to pay benefits under the Policy and for damages for breach of contract.  Plaintiff now moves for summary judgment on all of its claims.

BACKGROUND

On April 9, 2012, Larry Coassin submitted an application to Principal for a $10,000,000 life insurance policy to replace a MetLife life insurance policy for $10,000,000 which Mr. Coassin had been issued in 2011. The application mentioned a visit to a doctor for vertigo claiming “fine now.”

MEDICAL RECORDS

On November 23, 2012, a CAT scan of Mr. Coassin’s brain revealed a “very aggressive and unusual” brain tumor from which Mr. Coassin died on July 8, 2013. Because Mr. Coassin died within the two year contestability period, Principal initiated a routine contestable review and requested Mr. Coassin’s medical records. The medical records also demonstrated that although Mr. Coassin had told Principal that he had not seen any doctors between April 9, 2012, when he submitted his original application, and April 25, 2012, when he submitted the Amendment and Supplement, in fact he had seen two doctors during that period. He saw a cardiologist, Dr. Nadelmann on April 13, 2012 for lightheadedness, and an ear, nose, and throat specialist, Dr. Ronald Hirokawa, on April 17, 2012 for dizziness and lightheadedness. Dr. Hirokawa noted that Mr. Coassin had been experiencing his symptoms for the previous six months, and he ordered three tests to be performed on May 8, 2012: an audiogram, an auditory brain stem response report (“ABR”) and a VNG test.

After reviewing the results of those tests, Dr. Hirokawa recommended that Mr. Coassin “undergo an MRI scan to rule out a brain problem or nerve problem being the cause of the dizziness he had reported.” In November 2012, a second MRI scan revealed a tumor in Mr. Coassin’s brain. This tumor was so aggressive that they operated on it and they radiated it and it came right back within weeks.

CONTESTABILITY REVIEW

Based on the information that Principal Life learned after the insured’s death, and in accordance with its underwriting guidelines, the contestable reviewer determines whether a policy would have been issued to the applicant at the time of application had the true facts been known and, if so, under what conditions.

According to Mr. Berns, the reviewer, had Principal been aware of the true facts in April 2012, it “would have requested records from the April 17, 2012 visit with Dr. Hirokawa” and then “waited for the results of the scheduled testing” on May 8, 2012 and May 31, 2012.  However, when Dr. Hirokawa advised Mr. Coassin to see a neurologist on June 2, 2012, Principal would have declined coverage.

Mr. Berns testified that because Mr. Coassin was advised to seek a neurological consult on June 2, 2012, Principal would have “consider[ed] the cause [of the vertigo] to be not investigated” and would have declined coverage. On the basis of Mr. Berns’s recommendations, on October 16, 2013, Principal determined that the claim on Mr. Coassin’s policy was “not payable,” and that the Policy was void ab initio (from its inception).

DISCUSSION

Misrepresentation

For a material misrepresentation to render a contract voidable under Connecticut law, the misrepresenting party must know that he is making a false statement. ‘Innocent’ misrepresentations—those made because of ignorance, mistake, or negligence—are not sufficient grounds for rescission.

The Amendment

The Amendment that Mr. Coassin signed gave a bit more information about dizziness and vertigo. It was reasonable, Defendants claim, for Mr. Coassin to believe the Amendment was concerned primarily with his earache because the Amendment pertained to a question that asked about diseases or disorders of the eyes, ears, nose, throat or skin. This argument is, however, unavailing for several reasons. Mr. Coassin continued to experience three of the four symptoms listed in the Amendment after his December 2011 appointment. While it is true that Question 18J asked specifically about disorders of the eyes, ears, nose, throat or skin, the Amendment was broader, explicitly affirming that Mr. Coassin’s dizziness, lightheadedness and vertigo had resolved. It is not plausible, let alone reasonable, that Mr. Coassin read the Amendment to refer only to his earache.

The Supplement

There is no evidence supporting Defendants’ claim that Mr. Coassin’s response to the Supplement was substantially true. The Supplement asked “[h]ave you had any illness or injury or consulted a member of the medical profession since the date of the application?” to which Mr. Coassin responded “no.”  It is undisputed, however, that Mr. Coassin saw two doctors in the two weeks between completing the application and the Supplement.  Under any reasonable interpretation of the Amendment and the Supplement, Mr. Coassin’s responses were untrue and constituted misrepresentations. No reasonable factfinder could find otherwise.

Knowing

The question thus becomes whether Mr. Coassin’s misrepresentations were “knowing.”   In the short span of two weeks, Mr. Coassin saw not just one but two doctors for the same symptoms, and those symptoms were worrying enough to one of the doctors to cause him to order further testing. The second of the two appointments was just eight days before Mr. Coassin signed the Amendment and the Supplement attesting that he had not seen any doctors in the previous two weeks and that his symptoms had resolved. In these circumstances, no reasonable factfinder could conclude that Mr. Coassin’s misrepresentations were not “knowing.”

Materiality

Under Connecticut law, “a fact is material if ‘it would so increase the degree or character of the risk of the insurance as to substantially influence its issuance, or substantially affect the rate of premium.’ ” Great Am. Ins. Co., 607 F.3d at 295.

Connecticut case law strongly suggests that an answer to a question on an insurance application is presumptively material, and an inquiry into whether the insurer would have issued the policy had the applicant been truthful on the application is therefore appropriate.

The District Court concluded that based on the testimony of experts there is at least a genuine issue of disputed material fact whether Principal would have, on the basis of Dr. Potolicchio and Dr. Hirokawa’s opinions, issued the policy.  There is, therefore a genuine dispute of material fact as to whether Principal would have issued Mr. Coassin the policy if it had known the true facts which he misrepresented on his application. For that reason, summary judgment is not appropriate.

CONCLUSION

For the foregoing reasons, Plaintiff’s Motion for Summary Judgment was granted as to the question of whether Mr. Coassin knowingly misrepresented information on his insurance application and denied as to the question of the materiality of the misrepresentations.

ZALMA OPINION

It seems to me that the District Court wanted to please everyone. Finding that there was a knowing misrepresentation of fact it was not enough – regardless of the testimony of the insurer’s underwriter – that it would have done more investigation if the truth had been told on the application and the supplement and that the policy would not have been issued had the additional investigation been done. Since Mr. Coassin’s lies prevented the additional investigation the misrepresentations in most jurisdictions would be “material.” Hopefully, with the lies found as a matter of law the insurer will be able to prove materiality at trial.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Materiality Needed to Rescind a Policy

Zalma’s Insurance Fraud Letter – October 1, 2015

October 1, 1979 – 2015 Another Anniversary

Thirty six years ago today I left the world of the employed and became an entrepreneur by opening my own law firm that was incorporated shortly thereafter as Barry Zalma, Inc.

When I opened for business on October 1, 1979, I had no clients and no certainty that I would have any in the future. I had borrowed money from the bank to carry me through the first six months and was concerned about my ability to pay the loan with my second child about to be born.

Much to my surprise and pleasure, on October 1, 1979, at 8:10 a.m., my friend Alan Worboys called from London and provided me with my first case as an independent lawyer to represent Certain Underwriters at Lloyd’s, London. He, and the Lloyd’s Underwriters he represented, showed faith in me as a lawyer and insurance expert. Alan is now, and will forever be, my law firm’s first client and a good friend.

Since January 2, 1972 I have practiced law in California. To those of you, in addition to Alan, who have honored me by retaining me as your lawyer, thank you for a long, productive and successful legal career. I am now 73-years-old and expect to continue working forever or until I reach the century mark my mother reached before she passed away.

I will, however, limit my work to that as an insurance claims handling, insurance fraud and insurance bad faith consultant, expert witness, educator and author. That should keep me busy 40 hours a week.

I am not retiring, I am only slowing down and limiting my work.

I will continue to serve as an insurance claims handling, insurance coverage, insurance bad faith, and insurance fraud consultant and expert witness operating as Zalma Insurance Consultants (“ZIC”). I will continue to publish, twice a month, Zalma’s Insurance Fraud Letter and will publish daily to my blog, Zalma on Insurance, summaries of recent cases. I will also continue to contribute to the National Underwriter Company’s The Zalma Insurance Claims Library, FC&S Bulletin’s, articles for the National Underwriter Company’s National Underwriter Magazine, books for the American Bar Association and articles for LexisNexis. Finally, I will also continue to publish e-books on my web site at http://www.zalma.com/zalmabooks.htm.

Thank you again for your faith in me and my law firm.

I hope to continue to serve you and remain available as a claims handling consultant, expert witness and educator. Consultation with ZIC can save you or your client thousands of dollars in the defense or prosecution of an insurance dispute. ZIC will assist you in the effort to find a solution to an insurance claims dispute that is fair, intelligent, beneficial and economical.

ZIC is available to provide expert advice and, if needed, expert testimony to individuals and their counsel. Advice from ZIC is indispensable to the resolution of insurance disputes. Consultation from ZIC can save you, your counsel or client hundreds of hours of investigative and legal work.

With comprehensive knowledge of insurance and insurance claims handling Mr. Zalma understands, and can explain in language a lay jury understands, how and why insurance claims should be resolved.

Since I am the only one here I will always answer the phone or respond to your inquiries by telephone, e-mail, fax or even via the U.S. Postal Service.

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

The current issue of ZIFL reports on:

1.    Barry Zalma, Inc., Anniversary
2.    Proformative Academy
3.    It’s Sinful to Defraud Church Mutual
4.    Chutzpah & the Arsonist
5.    New From Barry Zalma
a.    Insurance Law
b.    Insurance Fraud and Weapons to Defeat Fraud
c.    Getting the Whole Truth
d.    Random Thoughts on Insurance – Vol. III
6.    Now You Can Protect Yourself Against Fraud
7.    Another Kind of Insurance Fraud

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

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

•    When a Court Errs by Ignoring a Full Credit Bid – September 30, 2015
•    Sexual Abuse of Child Never An Accident – September 29, 2015
•    Overzealous Expert Excluded – September 28, 2015
•    Coverage Case Stayed to Benefit Insureds and Claimants – September 25, 2015
•    Great Deal — Insurance Claims 101 & Book – September 24, 2015
•    How Far Can A Lawyer Fall – September 24, 2015
•    Fairly Debatable Claim Decision Defeats Bad Faith – September 23, 2015
•    It’s Sinful To Defraud Church Mutual – September 22, 2015
•    The Unfortunate Event Test Rules – September 21, 2015
•    Declaratory Relief Action Without Insured Fails – September 18, 2015
•    Insurance Claims Expert’s Testimony Limited – September 17, 2015
•    Courts Will not Strain to Create an Ambiguity Where None Exists – September 16, 2015
•    Insurance Shouldn’t Be Mentioned To Jury – September 15, 2015
•    Zalma’s Insurance Fraud Letter – September 15, 2015
•    Fraudulently Obtained Workers’ Compensation Policy – September 14, 2015
•    Insurance Coverage Trial Orders – September 11, 2015
•    When Does the Mediation Privilege End? – September 10, 2015
•    Buyers Remorse Doesn’t Get You More Coverage – September 9, 2015
•    What the Heck is a Bumbershoot Policy? – September 8, 2015
•    Duty to Report Promptly Is a Condition Precedent – September 7, 2015

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.
URL: http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html

Insurance Claims: A Comprehensive Guide
URL:  www.nationalunderwriter.com/InsuranceClaims

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

Mold Claims Coverage Guide
URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide
URL:  www.nationalunderwriter.com/ConstructionDefects

NEW FROM THE AMERICAN BAR ASSOCIATION

Diminution in Value Damages

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

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property that has been repaired, Diminution In Value Damages assists the reader in answering the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions.
This edition has been totally rewritten and expanded, providing the most extensive and detailed coverage of the issue and a thorough explanation of how to apply diminution in value damages to losses to property.

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

The Insurance Fraud Deskbook

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

BARRY ZALMA

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter – October 1, 2015

When a Court Errs by Ignoring a Full Credit Bid

Mortgagee’s Interest Limited to Security for Debt

When an insurance company is faced with competing claims to the proceeds of an insurance claim and cannot obtain the agreement of the competing parties it has no choice but to interplead the funds into court and let the parties demanding the funds litigate their rights. In Mercury Insurance Company of Georgia, V. Edward Jones, Joeann Jones, and Pamela Hoveland, Slip Copy, 2015 WL 5684093 (M.D.Ga., 9/28/15) the District Court for the Middle District of Georgia was asked to decide who had a right to the proceeds. Because one of the competing parties failed to respond to a motion for summary judgment the court, in my opinion, erred and gave funds to a mortgagee who had no interest in the proceeds.

FACTS

On November 14, 2013, Plaintiff Mercury Insurance Company of Georgia (“Mercury”) filed a complaint interpleading Defendants Edward and Joeann Jones (hereinafter collectively referred to as “Joneses”) and Defendant Pamela Hoveland (“Hoveland”). Plaintiff moved the Court to resolve the “respective rights of defendants to certain monies now held by Mercury and which Mercury asked the Court to allow it to pay into the registry of” the Court. On February 7, 2014, the Court granted Plaintiff’s Complaint for Interpleader, allowed for the $102,141.79 in insurance proceeds to be deposited in an interest-bearing account by the Clerk of Court, and discharged Plaintiff from any liability.

Hoveland then moved for summary judgment asserting that as first lienholder to the property at issue, she is due the $102,141.79 in proceeds deposited with the Court. Hoveland filed a summary judgment motion with a statement of undisputed facts, as required by the Federal Rules of Civil Procedure and the Local Rules of this Court. The Joneses did not respond to the Hoveland’s summary judgment motion or statement of facts as required. As a result, Hoveland’s Statement of Material Facts are admitted as a result of the Joneses’ failure to dispute those facts.

The Joneses first obtained a fee-simple interest as joint tenants with a right of survivorship at 225 Virginia Circle, Cairo, Georgia (hereinafter referred to as the “property”) on November 23, 2009.  To secure payment for the property the Joneses received a loan from Hoveland. In exchange for providing the Joneses with a loan, Hoveland received a note and security deed giving her a security interest in the Joneses’ property.  The Joneses purchased homeowners insurance from Mercury soon after buying their residence. The Homeowners Insurance Agreement named Hoveland as a mortgagee. The Homeowners Insurance Agreement also stated that any loss payable under Mercury’s insurance coverage for property dwellings or other structures would “be paid to the mortgagee and [the Joneses]”.  On October 18, 2012, when a fire occurred at the property, the Joneses were delinquent several monthly installment payments to Hoveland.  On October 22, 2012, after the fire, Hoveland’s Counsel sent the Joneses a notice of delinquency and informed them that Hoveland had instructed her Counsel to proceed with foreclosure proceedings if payment in full on the debt remaining, in the amount of $195,485.00, was not made.

After providing adequate advertisement, Hoveland proceeded with the non-judicial foreclosure sale of the property, consistent with her prior notice to the Joneses. On May 7, 2013, Hoveland purchased 225 Virginia Circle by foreclosure sale for $215,500.

Thereafter, as a result of the fire damage at 225 Virginia Circle, Mercury issued a check to both Hoveland and Edward Jones in the amount of $102,141.79. Mercury’s check was sent back by Hoveland’s Counsel. Hoveland’s Counsel also notified Mercury of a dispute between Hoveland and the Joneses regarding who should receive Mercury’s check settling the claim for fire damages initially filed by Edward Jones.

DISCUSSION

Hoveland’s Motion raises a narrow issue: that is, whether she is entitled to the insurance proceeds provided by Mercury as a result of the October 18, 2012 fire. Hoveland argues that as a secured mortgagee, designated in Mercury’s insurance policy, she is entitled to all of the insurance proceeds since the Joneses were in default an amount more than those proceeds. Hoveland also asserts that her purchase of 225 Virginia Circle, after her Motion for Relief was granted and prior to any repairs being made, required her to make considerable repairs she would otherwise be uncompensated for without the insurance proceeds. Although Hoveland provides limited legal authority to support her assertions, the District Court concluded that she is correct that there is no issue of material fact as to whether she is entitled to the insurance proceeds resulting from the October 18, 2012 fire.

Since the unpaid debt owed to Hoveland by the Joneses is substantially more than the insurance proceeds, those proceeds in their entirety serve as an alternative source of payment for the Joneses’ mortgage debt. As a consequence, the Court found that there is no genuine issue of material fact barring this Court from deciding that Hoveland is entitled to the $102,141.79 in insurance proceeds as a matter of law.

Although the Joneses did not respond to Hoveland’s Motion, after construing the record in a light most favorable to the Joneses, the Court found no support to make a contrary finding.  The Insurance Agreement and as aforementioned, the mortgage clause shows Mercury’s manifest intent to include Hoveland as a loss payee with interest in the insurance proceeds.

ZALMA OPINION

In my opinion, the court erred because the only interest Hoveland had in the property was as security for the mortgage debt. When that debt was paid in full at the foreclosure sale Hoveland no longer had an insurable interest. When the court delivered the interpleaded funds to Hoveland she profited from the fire by recovering  $102,141.79 more than the debt since she already received the full amount of the debt at the foreclosure sale.

Since the security was paid at the foreclosure sale Hoveland’s right to the proceeds of the insurance was eliminated.  In 1992 the Ninth Circuit decided Rosenbaum v. Funcannon, 308 F.2d 680, 684 (9th Cir.1992)) concluded when a mortgagee has purchased the property at a foreclosure sale, the mortgagee is no longer entitled to the benefits of an insurance policy taken out by the mortgagor. Because a “mortgagee’s insurable interest under an insurance policy is limited to the amount of the debt, once the debt has been fully extinguished by a full credit bid, so has the insurable interest.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 43 years as an insurance coverage and claims handling lawyer.  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on When a Court Errs by Ignoring a Full Credit Bid

Sexual Abuse of Child Never An Accident

Why Insurance Won’t Respond to Grandfather’s Evil Acts

Although liability insurance is designed to protect the insured against lawsuits seeking damage for bodily injury it does not, should not, and cannot cover some types of bodily injury. By definition, the acts causing an insured to be sued for damages, must be fortuitous. Intentional acts do not fit within the definition of insurance.

In State Farm Fire and Casualty Company Plaintiff v. James R. Estes, et al., Slip Copy, 2015 WL 5570055 (W.D.Ky. 9/22/15) the District Court for the Western District of Kentucky was faced with a claim seeking coverage for damages caused to a minor by her grandfather who sexually abused her.

FACTS

When she was a young girl, Ekaterina Estes was sexually abused. The abuse occurred from 2001 to 2004. In February 2010, her grandfather, James Estes, pled guilty to abusing Ekaterina during that time period. When she reached adulthood, Ekaterina brought suit against James and her grandmother, Clara Estes. She also added the State Farm Fire and Casualty Company (“State Farm”) because, since December 2007, James and Clara had a liability insurance policy (the “Policy”) for their home—the home where James abused Ekaterina. State Farm seeks a declaratory judgment that it need not indemnify nor defend James and Clara.

In January 2010 James Estes was charged in Kentucky state court with committing sexual abuse in the first degree against his granddaughter, Ekaterina Estes, who was then a minor. Ekaterina was younger than twelve, an aggravating factor that raised the crime to a Class C felony. James pled guilty one month later. He supported his plea with an admission that he had sexual contact with Ekaterina between February 2001 and February 2004. In exchange for his plea, the prosecutors recommended that he receive a five-year sentence, probated for five years.

When Ekaterina turned 18 she filed suit against her grandparents. Along with her grandparents, Ekaterina also sued their homeowners’ insurer, State Auto Property and Casualty Insurance Company (“State Auto”), as well as “unknown insurance companies.”  State Auto filed a declaratory judgment action in October 2013 in this Court.

Though State Auto acknowledged that its homeowners’ insurance policy was in effect during the alleged harms, it argued that exceptions to its policy applied. This Court agreed. Likewise, State Farm—the “unknown insurance company”—filed a declaratory judgment action. It argues that the Policy does not cover the harms done to Ekaterina for three primary reasons:

(1) her injuries did not occur during the effective dates of the Policy;

(2) even if the injuries happened during the coverage period, they are still not covered because they were not caused by an “occurrence” or accident; and

(3) as a final alternative, the intentional acts exclusion bars coverage.

THE POLICY

In October 2007 James and Clara applied for a “condominium unitowners” insurance policy for their residence in Louisville, Kentucky. State Farm issued the Policy; it became effective in December 2007 for a one-year period. It still remains in effect. James and Clara owned no State Farm policies prior to December 2007. The Policy explicitly excludes any bodily injury “which is either expected or intended by the insured; or … which is the result of willful and malicious acts of the insured[.]”

DISCUSSION

Kentucky law requires insurers to defend and indemnify under liability policies. Insurers must defend if any of the allegations potentially, possibly, or might be covered. That duty ends if the insurer can establish in fact that the policy does not cover the claim.

State Farm’s primary argument is that the harms done to Ekaterina, which occurred from 2001 to 2004, are outside the Policy’s coverage period because the Policy did not become effective until 2007. In the alternative, it argues both that Ekaterina’s allegations do not amount to “occurrences” as the Policy defines the terms, and that the intentional acts exclusion bars coverage. Because the Court agreed with State Farm that the harm occurred outside the coverage period, it agrees that declaratory judgment in State Farm’s favor is appropriate.

Based on Ekaterina’s complaint, the harms she complains of did not fall within the Policy’s coverage.

James Estes

Ekaterina’s state court complaint alleges that James sexually abused her from 2001 to 2004. She does claim that she continued to suffer other harms—like psychological damages and loss of enjoyment of life—after 2004, including after the Policy became effective. But her harms all fall outside the coverage period.

James contends that because Ekaterina stated that her mental anguish continued through 2009, the Court should treat this as one extended occurrence that fell during the coverage period.  The claim does not appear in a sworn affidavit from Ekaterina or a treating therapist but appears only in briefings.  The language of the complaint is what determines whether the Policy covers the claim, not arguments made in briefing. Ekaterina’s briefings implicitly concede that James’ conduct falls outside the Policy’s coverage.

Clara Estes

Clara’s position is more nuanced. Ekaterina argues that Clara failed to properly supervise Ekaterina and failed to protect her from the sexual abuse. The complaint further indicates that Clara invited Ekaterina to Clara’s home between 2001 and 2009, which subjected her to the harm and was later a trigger for psychological anguish because it reminded Ekaterina of the abuse.

The Policy covers “bodily injury,” but it expressly excludes from the definition of bodily injury any “emotional distress, mental anguish, humiliation, mental distress, mental injury, or any similar injury unless it arises out of actual physical injury to some person.”

Recent Sixth Circuit case law interpreting insurance contracts excluded from “physical injury” any sexual abuse that did not cause physical damage, like lacerations or bruises. There is no doubt that Ekaterina suffered emotional anguish when she had to visit James and Clara’s home and was reminded of the abuse she suffered. Those emotional harms were connected to the physical injuries Ekaterina sustained at her grandfather’s hand. The physical injuries, though, occurred years before the Policy came into effect. There is no bridge that would bring the later-suffered emotional harm under the Policy’s umbrella.

Even if Ekaterina’s abuse occurred during the Policy period, other issues preclude State Farm from having to defend or indemnify James. First, the Policy provides coverage for bodily injury caused by an “occurrence.” James’ acts were not occurrences. Kentucky has defined “accident” as “an unfortunate consequence which befalls an actor through his inattention, carelessness or perhaps for no explicable reason at all. The result is not a product of desire and is perforce accidental.” James’ acts were not accidental. Kentucky courts have been unequivocal on this point: “it is inconceivable that a criminal act of sexual molestation, the essence of which is the gratification of sexual desire, could possibly be an ‘occurrence’ for purposes of insurance coverage.” Thompson v. West Am. Ins. Co., 839 S.W.2d 579, 581 (Ky. App. 1992).

ZALMA OPINION

I agree totally with the District Court when it concluded: “Some actions—sexual molestation expressly included—are so inherently injurious, or substantially certain to result in some injury, that the intent to injure, or the expectation that injury will result, can be inferred as a matter of law.” Insurance can only provide coverage for a conditional, fortuitous or unknown event. Sexual abuse is neither. No insurer should be forced to provide defense or indemnity for such an intentional and evil act.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

Barry Zalma, Esq., CFE, practiced law in California for more than 42 years as an insurance coverage and claims handling lawyer until October 2015 when he asked that his license be designated as “inactive.”  He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on Sexual Abuse of Child Never An Accident

Overzealous Expert Excluded

Experts May Not Give Opinions on Legal Questions

Expert witnesses are usually essential to assist the trial court in evaluating claims of insurance coverage, insurance policy interpretation and insurance claims handling. The expert testimony, however, must be based upon the facts of the case and how those facts relate to the custom and practice of the insurance industry and its standard of care when interpreting insurance policies and the meaning of the policy when dealing with the handling of a claim presented to the insurer. Experts, especially lawyer experts, are tempted to use their experience as a lawyer to exceed the purpose of an expert by dealing with legal issues. I have been testifying as an insurance claims handling expert for the last 15 years or so and work very hard to avoid the temptation.

In Century Indem. Co. v. The Marine Group, LLC, Slip Copy, 2015 WL 5566351 (D.Or., 9/21/2015) the parties  moved to exclude the expert testimony of various insurance experts who allegedly exceeded the purpose of an insurance expert and fell prey to the temptation to render opinions about legal issues.

FACTUAL BACKGROUND

The U.S. District Court for the District of Oregon, is about to start the trial in a lawsuit concerning the alleged obligations of numerous insurance companies to defend and indemnify third-party plaintiffs The Marine Group, LLC; Northwest Marine, Inc.; Northwest Marine Iron Works; and BAE Systems San Diego Shop Repair, Inc. (“Third–Party Plaintiffs”); for costs incurred in connection with the assessment, removal, and remediation of hazardous materials released at the Portland Harbor Superfund Site. Phase I of trial in this case is scheduled to occur in November 2015. The Phase I trial will resolve each identified party’s duty to defend.

To determine each party’s duty to defend the court must identify specific insurance policies, construct lost policies and construe their terms, fix the time period for which each policy provided coverage, establish the existence and applicability of exclusions, and determine the obligations of excess and umbrella insurers.

In accordance with the court’s prior scheduling orders, the parties identified expert witnesses, exchanged expert witness reports, and deposed experts regarding the Phase I Trial issues. Thereafter, Third–Party Plaintiffs and four insurers-Granite State Insurance Company, Insurance Company of the State of Pennsylvania (“ICSOP”), Century Indemnity, and St. Paul Fire & Marine Insurance Company—each filed motions to exclude some or all of one or more expert witness’s testimony.

DISCUSSION

Third–Party Plaintiffs ask the court to strike Windt’s report and preclude him from testifying at trial because “Mr. Windt’s expert report is a legal analysis of the ICSOP and Granite State policies, followed by a legal conclusion on the ultimate issue of whether or not either insurer owes TPPs a duty to defend in this case.” Granite State and ICSOP do not argue Windt’s report is proper expert testimony. Instead they respond that Windt’s report is “virtually identical” to Hughes’s report in its content and conclusions; thus, if Windt’s report is excluded, then Hughes’s report also must be excluded. Windt’s report, however also includes references to the report of Third–Party Plaintiffs’ other expert, Dennis Connolly, and contests his opinions as well as Hughes’s.

Expert testimony is admissible if it “will help the trier of fact to understand the evidence or determine a fact in issue[.]” FED.R.EVID. 702(a). Thus, for example, expert testimony usually is admitted—and sometimes necessary—in cases involving claims of professional negligence, product defect, and business interruption damages, to prepare the jury to knowledgeably evaluate a party’s actions against an applicable standard of care, to aid the jury’s understanding of engineering data, and to help the jury evaluate complex financial records. But experts may not give opinions on legal questions.

The court’s task at Phase I trial is contract interpretation, which is a question of law for the court to decide. Specifically, the court will decide the legal question whether any of the insurance policies at issue obligate one or more of the insurers to provide a defense to Third–Party Plaintiffs in the underlying Portland Harbor Superfund Site litigation.

Windt’s 17–page report sets forth the law pertaining to excess insurance and the duty to defend, a discussion distilled from sections of the most recent edition of his insurance law treatise, Windt, Insurance Claims and Disputes (West 2013). In his report Windt cites his book more than 30 times and includes dozens of case citations and extensive discussions of cases. The court concluded that the report’s occasional mention of this case’s facts “are pretext for his legal analysis. Conclusions of law appear throughout Windt’s report.”

The court noted that the report of Mr. Windt is littered with impermissible legal conclusions on the issue of contract construction. The court recognizes, as the parties appear to do, Windt’s expertise in insurance law, but his report in this case provides no opinions about facts.

Both Hughes and Connolly (experts retained by other parties than the parties that retained Windt) discuss at length in their respective reports facts that assist the court’s understanding of industry practice, the purpose of specific insurance policy provisions, underwriting and claims handling, methodology for constructing lost policies, and other facts key to resolving questions about the existence and content of the insurance policies at issue.

Windt’s report discusses none of these topics or any other facts. Second, both Connolly and Hughes have extensive background and experience in the insurance industry, which equips them to explain and opine on the factual topics underlying the parties’ lost-policy dispute.

Windt is a lawyer who has never worked in the insurance industry. Mr. Windt is an attorney with experience handling insurance coverage claims but with no professional insurance experience as an adjustor, appraiser, umpire or other direct industry involvement.

Although portions of Connolly’s and Hughes’s respective reports might be inadmissible because they contain impermissible legal conclusions, certainly most of their reports’ content sets forth admissible expert testimony and opinion grounded on the facts of this case and their experience in the insurance industry. In sum, the Hughes and Connolly reports are not “virtually identical” or even similar to Windt’s under a Rule 702 analysis.

The court, therefore, struck the Windt report and precluded all parties from using that report in the case and precluded Windt from testifying at trial.

ZALMA OPINION

It is difficult to testify as an insurance expert witness and prepare a report for a federal court that will pass muster. Because I worked my way through law school as an insurance adjuster and spent almost my entire legal career representing insurers with insurance claims problems. Unlike Mr. Windt in this case I try to limit my testimony to the custom and practice of the insurance industry and explain to the trier of fact how the industry works in fulfilling the promises made by the policy of insurance. Hopefully I will never fall prey to the temptation that Mr. Windt fell prey to, and opine about ultimate issues.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Overzealous Expert Excluded

Coverage Case Stayed to Benefit Insureds and Claimants

The Need to Avoid Different Fact Findings

Insurance coverage disputes brought to defeat coverage while a tort suit is pending in a different court is prejudicial to the insureds if the coverage issue requires a resolution of factual disputes that must also be resolved in the tort action. The potential for divergent factual findings and potential harm to the insured must be balanced with the need for judicial economy.

In State National Insurance Company, Inc. v. US-Sino Investment, Inc., Slip Copy, 2015 WL 5590842 (N.D.Cal., 9/23/2015) Plaintiff State National Insurance Company, Inc. (“State National”) filed a declaratory relief action against 17 defendants stemming from three civil actions in state court involving the death of a construction worker.

FACTUAL BACKGROUND

State National alleges that on October 7, 2011, it issued SINO a commercial general liability policy effective October 9, 2011 to October 9, 2012 (the “Policy”). The Policy contained limits of $1 million per occurrence, $2 million general aggregate, and $2 million products/completed operations aggregate.

SINO and Chen subsequently entered into a contract whereby SINO agreed to build a custom home for Chen in Milpitas, California. SINO hired contractors to perform the work. A payment dispute with the contractor hired to perform soils/grading work allegedly ensued, resulting in the contractor leaving the job in late December 2011 or early January 2012 and leaving the walls unshored.  After enduring three weeks of rain, in mid to late January 2012, SINO, Liu and/or Luo hired new contractors and workers to work at the construction site, including the decedent Raul Zapata Mercado (“decedent”). An inspector from the City of Milpitas went to the construction site and issued a Stop Work Notice due to the danger of the unshored walls that included the likelihood of soil movement and collapse. Despite the Stop Work Notice, however, work allegedly continued on the construction site. On January 28, 2012, the decedent was working in a trench dug into the ground adjacent to an unshored wall, and was killed when the soil and earth moved causing the soil to bury him alive.

UNDERLYING CIVIL ACTIONS IN STATE COURT

As a result of this accident, three civil actions were filed in state court. In addition to the three civil actions, criminal charges were brought against Liu, Luo, and SINO. At oral argument, it was confirmed that Liu and Luo have been convicted and sentenced, and both are currently serving their term; and the criminal charges against SINO have been dismissed.

LEGAL STANDARD

The district court’s power to stay proceedings is incidental to the power inherent in every court to control the disposition of the causes on its docket with economy of time and effort for itself, for counsel, and for litigants. Using this power, one case may be stayed in favor of another.

In order to determine whether a stay should be implemented, various interests must be considered: (1) the possible damage which may result from the granting of a stay, (2) the hardship or inequity which a party may suffer in being required to go forward, and (3) the orderly course of justice measured in terms of the simplifying or complicating of issues, proof, and questions of law which could be expected to result from a stay. Whether to grant a stay request is a matter entrusted to the discretion of the district court.

DISCUSSION

The Pacheco Defendants move to stay these proceedings. The Pacheco Defendants argue that in adjudicating the instant declaratory relief action concerning insurance coverage based on certain exclusions of the Policy, this court will have to make certain factual determinations that are at issue in the state civil actions. Specifically, the Pacheco Defendants point to three major issues that will overlap between this action and the state civil actions: (1)     the intent of the insureds and others; (2)     the circumstances surrounding the nature of the accident; and (3)     the nature of the relationship between the insureds and the decedent.

In opposition, State National argues that there is no entanglement between the federal and state proceedings because, in the instant action, the only issues before the federal court are whether State National has a duty to defend or indemnify its insureds in any of the state court actions based on undisputed facts. State National further argues that this court will be presented only with questions of law since it will be examining the terms of the Policy, and thus there is no risk of duplicative litigation.

Upon examining the Policy exclusions State National seeks this court to evaluate in determining coverage, this court agreed with the Pacheco Defendants that such evaluation will necessarily require certain factual determinations. While State National argues that it is sufficient to find that the decedent was buried, the court agrees with the Pacheco Defendants that causation is a key issue in determining the application of this exclusion.

Application of the exclusions require a factual determination as to whether the subsidence arose out of or is attributable to the insured’s ongoing operation or performed on the insured’s behalf. The causation of the accident and the insured’s conduct are issues being litigated in the state civil proceedings.

THE POSSIBILITY OF DAMAGE, HARDSHIP OR INEQUITY

The court considered the possible damage to State National in granting a stay, and the potential hardship or inequity imposed on the Pacheco Defendants in the absence of a stay. State National argues that if a stay is granted, it will suffer prejudice because it would be forced to continue paying defense costs for the state court actions even if it is ultimately found that there was no duty to defend.  On the other hand, the Pacheco Defendants argue that litigating this action will impose a hardship because their focus and limited resources will be pulled away from their state court action in order to defend this action. The Pacheco Defendants further argue that litigating this insurance coverage action before the resolution of the Pacheco Defendants’ state court action will deprive the Pacheco Defendants of the right to have factual issues adjudicated in their chosen forum—state court.

In weighing the risks of prejudice and hardship, it appears that the Pacheco Defendants will endure a greater level of risk. While State National expressed at oral argument that it should not be punished for “doing the right thing” by providing a defense to its insured, providing such a defense is part of an insurer’s obligation and cost of doing business. A temporary stay of this action will not preclude State National from seeking reimbursement of defense fees and costs should it become necessary in the future.

The Pacheco Defendants, however, will suffer prejudice and hardship in the absence of a stay. Under the circumstances now presented, the Pacheco Defendants have been forced to defend a federal insurance coverage dispute in which they are not the insured. Given their limited resources, it is a significant burden for the Pacheco Defendants to litigate claims in two courts.

BALANCING AND CONCLUSION

On balance, the potential prejudice and hardship to the Pacheco Defendants that could result from inconsistent factual determinations outweighs any slight amount of prejudice State National may suffer from a temporary stay. Additionally, a temporary stay may result in the simplification of issues in this action. Therefore, the court concluded that abatement in favor of the parallel state proceedings is justified. Accordingly, the Pacheco Defendants’ Motion to Stay will be granted.

ZALMA OPINION

In this case, however, the action filed by the insurer that required a finding of fact similar to the facts that were needed to be proved in the tort action, would require the plaintiffs to litigate the same facts in two different courts and impose on them the potential for different factual findings in different courts. Since the insurer reserved its rights and could get back the money expended for defense, the court properly balanced the equities and stayed the declaratory relief action.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Coverage Case Stayed to Benefit Insureds and Claimants

Great Deal — Insurance Claims 101 & Book

600px_BarryTop5Insurance Claims 101 Webinar

SKU: INSWEB

Be the first to review this product

Availability: IN STOCK

$99.00

Quick Overview

Insurance Claims 101: Webinar + Book + CE Credit for ONLY $99

September 30, 2015 at 2pm EDT

Exclusive $99 Webinar Bundle Offer Includes:

  • 1-Hour Webinar: Insurance Claims 101
  • Insurance Claims: A Comprehensive Guide
  • CE Credit has been applied for CA, CT, FL, LA, NC, NY, OH, PA, TX, and VA and is pending certification by their respective Departments of Insurance

Insurance Claims 101 Webinar

Look Inside The Book

Webinar + Book + CE Credit: ONLY $99

What every insurance professional must know about claims handling.

September 30, 2015 at 2pm EDT

Featured Speaker: Barry Zalma, Esq., CFE

Exclusive $99 Webinar Bundle Offer Includes:

  • 1-Hour Webinar:  Insurance Claims 101
  • Insurance Claims: A Comprehensive Guide: 2-volume book | 1,648 pages (a $196 value
  • CE Credit has been applied for CA, CT, FL, LA, NC, NY, OH, PA, TX, and VA and is pending certification by their respective Department of Insurance.

1-Hour Webinar Covers:

  • The Claims Adjuster Exists for Two Purposes
  • The Claims Adjuster’s Duties
  • The Public Adjuster’s Duties
  • How to Investigate a Claim
  • The Covenant of Good Faith and Fair Dealing
  • What are the Grounds for Finding Bad Faith

Insurance Claims 101 Webinar Bundle includes Insurance Claims: A Comprehensive Guide

This book delivers coverage of every key topic, including:

  • Bad Faith
  • Conditions, warranties, and exclusions
  • Declaring a policy void
  • Duties of insured and insurer
  • Evaluation and settlement
  • Identifying insurance fraud
  • Investigation
  • Kinds of insurance policies
  • Other insurance clauses
  • Preparing a case for trial
  • Processing a claim
  • Responses to fraud
  • Subrogation and salvage
  • Underwriting
Posted in Zalma on Insurance | Comments Off on Great Deal — Insurance Claims 101 & Book

How Far Can A Lawyer Fall

Lawyer Stays In Jail As a Result of Health Care Fraud Scheme

When the FBI continually failed to find evidence to prosecute Al Capone for his many criminal activities they were able to put him out of business by charging and convicting him of tax fraud. Insurance fraud perpetrators, similarly, find it impossible to report their true earnings from their fraudulent activities, exposing them to charges of tax fraud and conviction of felonies for failing to report the money made from insurance fraud.

In People v. Francis, Not Reported in Cal.Rptr.3d, 2015 WL 5047786 (Cal.App. 4 Dist., 8/26/15), the California Court of Appeal was requested to deal with sentencing of individuals, including an experienced lawyer, who made millions from insurance fraud and did not report the earnings on their tax returns.

FACTS

A jury convicted Dee Francis, Andrew Robert Harnen, and Roy Chester Dickson of multiple felony tax offenses related to an insurance fraud scheme. Specifically, the jury convicted Francis and Harnen of filing false personal income tax returns; failing to file personal income tax returns, and failing to file corporate income tax returns. The jury also convicted Harnen of filing a false corporate return, and convicted Dickson of two counts of filing a false personal income tax return. The trial court sentenced Francis to an aggregate prison term of six years, Harnen to five years and four months, and Dickson to two years and eight months.

In 2001, the Orange County District Attorney’s Office uncovered a health insurance scam at Unity Outpatient Surgery Center, LLC (Unity), which paid bounties to patients and to patient recruiters, known as “cappers,” to sign up healthy individuals for unnecessary surgical procedures. The bounties were substantial, totaling more than a $110,000 a year for one recruiter, for example. Unity, in turn, then billed the patients’ insurers for millions of dollars. The bounties violated state and federal law and therefore insurance companies were not obligated to pay for the resulting procedures.

The investigation implicated both men and Dickson in the fraud scheme: Francis as vice president of operations, and Harnen in accounting, and Dickson to a lesser degree, for which they were later prosecuted. In the meantime, the trio’s criminal troubles also led to the tax prosecution in this case.

DISCUSSION

Dickson contends the trial court erred by allowing the prosecutor to impeach his claim that he “always” erred on the side of overstating his income when filing his taxes, including in 2003 when he filed his original return that reported gross income of $85,173 and when he filed his amended return that year reporting gross income of $188,926. Specifically, Dickson testified he “always felt that I overestimated” income in filing his taxes, and on cross-examination characterized his manner of filing his annual return: “I always felt that the numbers I gave were an overestimate of what I had earned.”

When the prosecutor asked, “Where [did] you come up with the cash to pay for about 29,000 in itemized deductions,” Dickson answered in a manner the jury could consider evasive, stating that he had “no recollection” about “specific numbers.”

The crux of Dickson’s appellate challenge is his correct observation that a taxpayer does not have to pay expenses with income earned in the same year, and therefore a low reported income in comparison to claimed expenses does not necessarily indicate unreported income. The flaw in Dickson’s argument is simply that the prosecutor did ask him where he “c[a]me up with the cash” to pay his claimed expenses, and when Dickson answered evasively, the jury could infer he lacked the independent resources to pay those expenses and instead underreported his actual income. There was no missing predicate in the prosecutor’s impeachment theory.

In particular, noting that several of the original codefendants had pleaded guilty and received lengthy prison sentences, the court observed regarding Francis, Harnen, and Dickson that people involved in similar conduct should receive similar sentences unless there’s something extraordinary to differ. The court found nothing significantly different about Dickson in the tax prosecution because, like the others, he had committed tax fraud.

The court treated defendants’ ages in their 50’s and 60’s as a mitigating factor, and noted they had little or no prior criminal history, although Dickson had a prior offense in Michigan when he was younger and had been disciplined by the California State Bar. However, the court viewed defendants’ active participation in a major fraud and their lack of remorse as aggravating factors.

The reasoning of the trial court is worth reading in full:

“I was going to talk to you a little more but I’ve gone on longer than I intended to. I will only observe that, frankly, you are in a different position in a positive way for the reasons I’ve noted. You came on the scene later. You were not as integral a part of the massive fraud but Mr. Pham Vu [the principal fraud mastermind, charged in the underlying offenses] needed a good aggressive lawyer to do what he was doing and you were the guy.

“You have a higher responsibility. You know it and I know it. The reason that lawyers in our justice system do not receive from members of this community and the public in general the level of respect that they should receive, since this is a country based on the rule of law, is because members of the community thinks—think that lawyers by and large do their job by lying and cheating and stealing.

“And the reason, at least one reason they have that perception is they read about cases like this in the newspaper, which they’ll probably do tomorrow in the Register or the Times or some of our local newspapers or on the Internet. And they’ll see, unfortunately, a lawyer with your education, training, and experience went to UCLA law school, practiced in this community for, what, 30 years, has been convicted of felonies and sentenced to prison because he got caught lying, cheating, or stealing.

“So it reinforces the impression that people have of this profession in the most negative way possible. You and I both know that most lawyers don’t practice that way; that most lawyers are mindful of their ethical and legal obligations. And they’re vigorous advocates but they practice with professionalism and integrity, which is lost on members of the public because they don’t see it. What members of the public see are ugly situations like this.

“So if you go on the Register Website tomorrow, you’ll probably see people who don’t know what they’re talking about talking about the system and another lawyer getting convicted. And I don’t know you well, Mr. Dickson, but your—our paths have crossed professionally over the years. And it’s particularly sad for me to send you to prison all things considered. You always in my court seemed to vigorously and professionally represent your clients, and now here you are.

“It’s a very sad situation, Mr. Dickson. And I don’t get any great pleasure of sentencing any of you folks to prison today, but perhaps Mr. Dickson I regret the most. The rest of you folks were in it for a long time up to your elbows and you know what you were into. Maybe at least initially Mr. Dickson didn’t know what he was getting himself into, but at some point he certainly did. And he knew he had income and he knew he wasn’t filing tax returns.”

The court’s comments reflected that it knew and respected Dickson’s legal acumen from prior court appearances, and that it understood how the case might reflect poorly on lawyers in the court of public opinion, but that, ultimately, Dickson’s sentence turned on the acts he committed and his personal culpability. The court did not err factually or legally in mentioning Dickson’s role as a lawyer in the underlying fraud, nor did the court abuse its discretion in imposing the middle term.

ZALMA OPINION

Dickson, an experienced and respected lawyer fell in with “clients” who were engaged in a multi-million dollar fraud scheme. He accepted their money and because the fraud proceeds would increase his annual reported income logarithmically and raise suspicions of criminal activity. He was not convicted of the insurance fraud but will spend more than two years in state prison for his crime. He will, as a result, never practice law again. Thus fell a mighty lawyer.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on How Far Can A Lawyer Fall

Fairly Debatable Claim Decision Defeats Bad Faith

UIM Claim Requires Proof

Insurance companies are obligated to thoroughly investigate a claim presented to it and make decisions based upon that investigation when evaluating the claim.

In Peden v. State Farm Mutual Automobile Insurance Company, Slip Copy, 2015 WL 5244934 (D.Colo., 9/9/15) State Farm was sued for failing to pay the limits of its UIM coverage promptly and compelling the insured to sue for benefits and bad faith tort damages. State Farm, claiming it paid what it owed moved for summary judgment.

BACKGROUND

Plaintiff incurred serious injuries during a car accident on November 10, 2012. Plaintiff and three other passengers were injured when the 1962 Volkswagen Van they were riding in was involved in a single car accident caused by the driver, Terrill Graf. After the accident, the driver was charged with DUI, DWAI, DUID and vehicular assault while driving under the influence of alcohol or one or more drugs or both.

Plaintiff’s claims against the at-fault driver for bodily injury liability coverage were settled by State Farm Representative Matt Schultz on February 4, 2014. Because the amount of her compensatory damages exceeded the liability settlement, Plaintiff made a claim to State Farm pursuant to the available under-insured motorists (“UIM”) coverage. UIM coverage, in the amount of $350,000, was available to Plaintiff through the policy on the VW Van and through her own policy with State Farm.

State Farm denied her claim for UIM benefits. The reason provided for the denial was that State Farm believed that Plaintiff was “fairly compensated by payment of the $210,000 bodily injury liability settlement, as well as the $30,000 previously paid” in medical payments coverage.

The policies at issue here require that when State Farm and its insured cannot agree on the amount of the compensatory damages that the insured is legally entitled to collect, the insured must file a lawsuit. Therefore, following State Farm’s denial of her UIM claim, Plaintiff filed a lawsuit against State Farm.

After Plaintiff filed this lawsuit, State Farm re-evaluated Plaintiff’s UIM claim a year after its initial denial, and made an offer of settlement in the amount of $179,660.01 on February 27, 2015, based on information subsequently provided by Plaintiff. Although Plaintiff did not agree to the settlement offer, State Farm paid her the $179,660.01 on March 18, 2015. Then, on May 15, 2015, State Farm paid Plaintiff the remaining $170,339.99. As such, State Farm has now paid Plaintiff $350,000, which constitutes the full amount of the UIM benefits available to her.

ANALYSIS

The purpose of a summary judgment motion is to assess whether trial is necessary.

Colorado law provides that, due to the special nature of the insurance contract and the relationship which exists between the insurer and the insured, an insurer owes a common law duty of good faith and fair dealing, whose breach may give rise to a separate cause of action arising in tort. When an insured sues his or her insurer for bad faith breach of an insurance contract, the insured must prove that (1) the insurer acted unreasonably under the circumstances, and (2) the insurer either knowingly or recklessly disregarded the validity of the insured’s claim.

The reasonableness of an insurer’s conduct is determined objectively, based on proof of industry standards. The fact that an insurer’s reason for denying or delaying payment of a claim was “fairly debatable” weighs against finding that the insurer acted unreasonably.

For purposes of bad faith, the reasonableness of an insurer’s conduct is evaluated under the circumstances that existed at the time. What constitutes reasonableness under the circumstances is ordinarily a question of fact for the jury. However, in appropriate circumstances, as when there are no genuine issues of material fact, reasonableness may be decided as a matter of law.

Following the accident Mr. Graf was charged with vehicular assault while driving under the influence and reckless driving. The Injury Questionnaire form completed by Plaintiff’s counsel indicated that the purpose of the trip was “Pleasure-Joyride” and Ms. Krist (the UIM Adjuster) testified that it was her usual course of action to consider this information when handling Plaintiff’s claim. As such, based on these facts, State Farm assessed Plaintiff’s claim and denied her request for UIM benefits on the basis that her documented damages to date, reduced by 15% based on State Farm’s assessment of her assumption of risk, was covered by the bodily injury benefits and medical payments coverage she had already received.

Only after its denial of Plaintiff’s UIM claim, and the filing of this lawsuit, did Plaintiff indicate that she did not know that the driver was intoxicated and that she did not intend to go for a ride with him. In addition, it was not known that Plaintiff was a surgical candidate until after the filing of this suit. In fact, she did not present a future substantial wage loss claim until this lawsuit was filed. As this new information was obtained, State Farm ultimately paid Plaintiff the maximum UIM benefit amount.

The court concluded that decisions State Farm made in adjudicating the UIM claim were, at the time they were made, reasonable as a matter of law. First, it is undisputed that at the time of the denial of the claim, State Farm’s file contained no evidence that Plaintiff was an unwilling passenger in the vehicle, nor did it contain evidence that would refute the reasonable inference that she knew Mr. Graf had been drinking at the time he took the wheel. Furthermore, State Farm’s conclusion that she had been drinking and had agreed to go for a joyride with Mr. Graf, who was visibly intoxicated, was not—under the circumstances that were known at the time—in any way unreasonable.

State Farm was limited in its ability to obtain complete police reports due to the pending criminal charges against Mr. Graf. Plaintiff does not dispute that prior to the denial State Farm asked for a statement from Plaintiff and that she declined. In addition plaintiff’s counsel was advised that State Farm believed that there was a significant assumption of the risk by the passengers. There is no evidence that Plaintiff’s counsel advised State Farm that Plaintiff was unaware that Mr. Graf was intoxicated and did not intend to go for a ride with him.

In addition, Plaintiff does not dispute that her future damages (both medical and lost earning capacity) were, at the time of denial, speculative; specifically, at the time of the denial Plaintiff was not a candidate for surgery and she had not made any claim for future wage loss. It was not until after this lawsuit was filed that Plaintiff indicated that she would need surgery and that she was making a specific claim for future lost wages.

Therefore, the court rejected Plaintiff’s argument to the extent she contends that State Farm’s decision, at the time of its denial, was unreasonable based on its lack of investigation into the matter.Furthermore, the court concluded that the undisputed facts show that State Farm’s delay in paying the UIM benefits after Plaintiff filed this lawsuit was reasonable as a matter of law. It was the new information that prompted it to increase her damages and, in turn, offer a settlement of her claim for a portion of the UIM benefits and then, when Plaintiff refused, to advance payment without condition.

It was not until March 30, 2105 that Plaintiff disclosed an economic loss report calculating her future income loss and again, in light of this new information and its own expert evaluation, State Farm paid her the remaining policy limits a month and a half after receiving it.

Therefore, State Farm’s conduct and decisions in evaluating Plaintiff’s UIM claim in this case was, at each point, made with a reasoned basis and without reckless disregard as to the validity of her claim. As such, based on the undisputed facts, State Farm’s motion seeking summary judgment in its favor was granted as a matter of law.

ZALMA OPINION

Insurance claims people are not required to be clairvoyant. They can only make decisions based upon information available from the insurer’s investigation. When the person seeking the benefits of an insurance policy refuses to provide an insurer with a statement the insurer is obligated to make a decision based upon the information it has available. Here, the plaintiff, kept information about the accident and her injuries to herself and did not disclose them to her insurer until the course of litigation and discovery. Since there was a genuine dispute about the value of her injuries the court reasonably concluded the claim was fairly debatable and there was no bad faith.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Fairly Debatable Claim Decision Defeats Bad Faith

It’s Sinful To Defraud Church Mutual

Proactive Fraud Fight

The attempt to reduce insurance fraud takes more than denying a fraudulent claim and reporting that fraud to police agencies. If fraud is to be effectively reduced insurance companies must be proactive and take the profit out of the attempted fraud.

In Church Mutual Insurance Company v. Alliance Adjustment Group, — F.Supp.3d —-, 2015 WL 5334358 (E.D.Pa., 9/14/15) an insurer who insures churches found that one of its church insureds was the unwitting participant in what Church Mutual alleges was a series of fraudulent claims instigated by a public insurance adjuster and group of lawyers retained by the public adjuster to enforce their attempted fraudulent claim.

Church Mutual Insurance Company (Church Mutual) sued the licensed public adjuster and his public adjustment group, a law firm and two of its lawyers, and two companies contracted to examine and perform repairs to a property insured under a policy issued by Church Mutual to non-party African Episcopal Church of St. Thomas (AEC) for fraud. Church Mutual alleges Defendants Alliance Adjustment Group (Alliance) and James Wagner (together, the adjusters) filed two fraudulent insurance claims on behalf of AEC with the assistance of DeLong Service Co., Inc. (DeLong), an HVAC/chiller contractor, and JLD Emergency Services (JLD), an emergency remediation contractor.

When Church Mutual denied one claim in part and the other entirely, the adjusters hired Defendants Claims Worldwide, LLC, Joseph A. Zenstein, Esq., and Joseph Thiroway, Esq. (together, the lawyers) to pursue the coverage claims in court. Ultimately, AEC dismissed that litigation with prejudice after hiring alternative counsel. Church Mutual subsequently filed this action against the adjusters, the lawyers, DeLong, and JLD, asserting claims for negligent misrepresentation, fraud in violation of the Pennsylvania Insurance Fraud Statute, 18 Pa. Cons.Stat. § 4117 (Count II), and civil conspiracy (Count III).

The Defendants have moved separately to dismiss the Complaint: (1) the adjusters, Alliance and Wagner; (2) the lawyers, Claims Worldwide, and Thiroway, and Zenstein. All three sets move to dismiss the three-count Complaint for failure to state a claim.

BACKGROUND

Church Mutual has long insured AEC, a church in West Philadelphia, against property damage. Over the course of this relationship, Church Mutual has processed several claims on AEC’s behalf. For instance, in 1996, AEC’s property suffered extensive damage as a result of water infiltration, and Church Mutual paid AEC $514,000, of which $140,000 was used to repair the roof. No other repairs were made.

On December 19, 2011, AEC entered into a contract with Alliance, which is owned by Wagner, a licensed public adjuster. The contract authorized Alliance or its representative to assist in the adjustment of an insurance claim allegedly arising from “loss by water” on August 30, 2011. The contract provided AEC would pay the adjusters 25% of any amount paid by the insurance company in settlement of the loss. Two days later, the adjusters filed a claim reporting that AEC’s property had sustained damage due to frozen copper pipes in the property’s HVAC/chiller system, causing water to leak on August 30, 2011 (hereinafter the chiller claim). Church Mutual hired two experts to investigate the chiller claim. Colin Seybold, a forensic mechanical engineer, reported the water damage claimed resulted from defectively installed or missing insulation, which is not covered by the insurance policy. The other expert, Dewpoint Mechanical, an HVAC contractor, indicated it was highly improbable the damage was caused by frozen pipes. As result, Church Mutual denied coverage on the chiller claim on July 24, 2012.

On January 30, 2012, while the chiller claim was pending, AEC entered into a second contract with Alliance, retaining Alliance to assist in adjusting a claim arising from “loss by storm” on August 27, 2011. The adjusters filed an insurance claim alleging AEC sustained severe damage on August 27, 2011, as result of Hurricane Irene (hereinafter the hurricane claim). The adjusters also attached an undated estimate for $1,147,451.40 in repairs and again listed repair costs for a number of rooms in the property without explaining what work needed to be done or how the hurricane caused the damage. Church Mutual’s structural engineer, Russ Daniels, determined the damage allegedly caused by the hurricane was already present during a July 2011 Risk Control Inspection of the property and opined the majority of the damage resulted from wear and tear, not the hurricane.

Daniels also noted aerial photographs of AEC’s roof taken six weeks after the hurricane and later in 2013 showed no damage. Church Mutual’s adjuster, Lew Gohean, who handled the 1996 claims for water infiltration, concluded the interior water damage allegedly caused by the hurricane was identical to the damage presented in AEC’s 1996 claim. During discovery, the lawyers deposed three individuals affiliated with AEC: Richard Jones, Randall Blakeney, and LeDon Elliotte. Jones, the rector’s warden, denied seeing the estimates Alliance submitted to Church Mutual and testified the areas set forth in the estimates had not sustained damage. Blakeney, the Church’s property chair, testified that other than a leak in the sanctuary of the church, the hurricane did not damage the property. Elliote testified the roof of AEC’s sanctuary has leaked since 2010, before the hurricane. Because AEC’s own witnesses disavowed substantial portions of the damages Alliance sought on AEC’s behalf, AEC subsequently retained alternate counsel and dismissed both actions with prejudice.

Church Mutual the sued claiming Defendants failed to conduct a proper investigation before submitting the hurricane and chiller claims, negligently or knowingly submitted claims containing false information, negligently or knowingly pursued the claims in litigation, and conspired with each other to profit through the filing of these false claims.

DISCUSSION

To survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. The court must accept all of the complaint’s well-pleaded facts as true, but may disregard any legal conclusions, and must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a plausible claim for relief.

To establish liability a plaintiff must show that the defendant is in the business of supplying information for the guidance of others and the information provider must have a pecuniary interest in the transaction; the information provided is false; the information was justifiably relied upon; and the defendant failed to exercise reasonable care in obtaining or communicating the information.

As insurance adjusters, Alliance and Wagner run a business which provides services and/or information that they know will be relied upon by third parties in their business endeavors. And the Complaint sufficiently pleads Alliance and Wagner negligently misrepresented information about the damages suffered by AEC’s property to Church Mutual. Church Mutual has also alleged these Defendants had a pecuniary interest in the transaction, as they entered into a contract with AEC to receive 25% of AEC’s recovery.

The Court concluded that the Complaint sufficiently alleges that Church Mutual justifiably relied upon the information provided by the adjusters. Even though an insurer may customarily conduct its own investigation before approving or denying an insured’s claim, the insurer may still rely on the information provided by the insured as the basis for its investigation. Moreover, that the insurer may investigate the claim “does not give an insured or its representative license to invent, inflate, or otherwise misrepresent the damages alleged in a claim.” Without the allegedly false claims filed by Alliance and Wagner, Church Mutual would not have been forced to expend time and resources investigating the alleged damage to AEC’s property and defending its decision in the previous litigation.

As to Count II, Church Mutual has also stated a claim for fraud against Alliance and Wagner under the Pennsylvania Insurance Fraud Statute which creates a private cause of action for insurers to remedy various types of insurance fraud. To state a claim under the statute a plaintiff must allege the defendant (1) knowingly (2) presented false, incomplete or misleading information (3) concerning any fact or thing material to a claim (4) to an insurer.

The complaint pleads with particularity that the adjusters knowingly submitted claims for non-existent damages and damages outside of the policy coverage.  Further, Alliance and Wagner knew the damage could not have been caused by the hurricane, as the damage was present in photographs taken during a July 2011 inspection of the church, several months prior to the hurricane, yet not visible in photographs taken six weeks after the allegedly date of loss and in 2013.

Finally, as to Count III, Church Mutual has stated a claim against Alliance and Wagner claim for civil conspiracy. To state a claim for civil conspiracy, a plaintiff must allege a combination of two or more persons to do a criminal act, or to do a lawful act by unlawful means or for an unlawful purpose.

Church Mutual alleges the adjusters and lawyer Defendants agreed to pursue fraudulent insurance claims, with the assistance of the two contractors, on a contingency fee basis and share any profits gained. In furtherance of this scheme, Alliance and Wagner submitted a claim for water damage knowing the damage did not occur as a result of frozen pipes. When they were unable to recover on those claims, the adjusters directed the lawyers to file complaints alleging untrue facts without AEC’s knowledge or approval. During the course of that litigation, Defendants refused to produce copies of all the photographs taken by JLD. Ultimately, AEC demanded the lawyers and the adjusters withdraw or dismiss the actions multiple times, but they would not. Because Church Mutual has adequately alleged a civil conspiracy claim against the adjusters, Count III will not be dismissed.

Claims Worldwide, Zenstein, and Thiroway also seek dismissal of all three counts of Church Mutual’s Complaint. The Court granted the lawyers’ motion as to Count I, the negligent misrepresentation claim. As pleaded, Church Mutual’s claim is premised on the lawyers negligently filing complaints and/or pleadings premised on false or misleading information or containing such information. The Court dismissed Count I as barred by Pennsylvania’s judicial privilege. The judicial privilege provides immunity for communications which are made in the regular course of judicial proceedings and are material to the relief sought, whether made by a party, a witness, an attorney, or a judge. Statements contained in pleadings, as well as statements made in the actual trial or argument of a case, are privileged.

The lawyers also move to dismiss Church Mutual’s claim pursuant to Pennsylvania’s Insurance Fraud Statute. All alleged misrepresentations made by the lawyers were made during the course of litigation, and, thus, their actions are shielded by the judicial privilege. The Court therefore will also dismiss Count II as to the lawyers.

Finally, the lawyers seek dismissal of Church Mutual’s civil conspiracy claim, arguing because they acted within an attorney-client relationship, they cannot be considered conspirators. The  lawyers’ actions, as alleged, were not within the context of an attorney-client relationship with AEC, and they are not entitled to application of the intracorporate conspiracy doctrine.

ZALMA OPINION

Church Mutual has done something that should be emulated by all insurers faced with a false and fraudulent claim – act proactively to take the profit out of the fraud. It should be obvious to the court that a public adjuster taking 25% contingency fee would, even if the claim is paid in full, would make it impossible for the church to perform the needed repairs unless they inflated the claim excessively. They tried and failed. They should be held to pay for all damages incurred by Church Mutual and the local prosecutors should take note of the criminal aspects of the claims presented by the public adjusters and lawyers.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

 

Posted in Zalma on Insurance | Comments Off on It’s Sinful To Defraud Church Mutual

The Unfortunate Event Test Rules

Can’t Aggregate Three Accidents into One

Insurance policy limits of liability can cause disputes between insurers and their insureds so that if there is one accident rather than three (even though the result from a single continuous and repeated exposure to the same general conditions) can limit the exposure faced by the insurer.

In National Liability & Fire Ins. Co. v. Itzkowitz, — Fed.Appx. —-, 2015 WL 5332109 (C.A.2 (N.Y.) 9/15/2015) the insurer argued for a single accident while the injured parties argued for three separate accidents.

National Liability & Fire Insurance Company (“National”) appealed from a final judgment entered on September 8, 2014, by the United States District Court for the Eastern District of New York (Chen, J.), which granted the defendants’ motion for summary judgment. The question on appeal is whether the district court erred in determining that a series of events occurring on Interstate 90 constituted three separate “accidents” for the purposes of the National insurance policy at issue.

THE POLICY

The policy at issue provides in relevant part: “Regardless of the number of covered ‘autos’, ‘insureds’, premiums paid, claims made or vehicles involved in the ‘accident’, the most we will pay for the total of all damages … resulting from any one ‘accident’ is the Limit of Insurance for Liability Coverage shown in the Declarations. All ‘bodily injury’ [and] ‘property damage’ … resulting from continuous or repeated exposure to substantially the same conditions will be considered as resulting from one ‘accident.’”

Additionally, the definitions section of the policy defines an accident to include “continuous or repeated exposure to the same conditions resulting in ‘bodily injury’ or ‘property damage .’”

FACTS

Although the parties dispute the exact chronology of the events at issue, it is undisputed that the relevant series of events began when a dump box attached to a dump truck struck and damaged an overpass owned by the New York State Thruway Authority. After hitting the overpass, the dump box separated from the truck and landed in the right lane of the highway.

Between thirty seconds and five minutes later, the vehicle occupied by the “Itzkowitz claimants” struck the detached dump box. And then, at some point between a few seconds and twenty minutes later, the vehicle occupied by the “Compton–Hershkowitz claimants”  struck the same detached dump box. National argues that this series of events constituted one accident, or at most two separate accidents, under the policy. The defendants disagree, arguing that the district court correctly determined that three accidents occurred.

Under New York law, absent policy language indicating an intent to aggregate separate incidents into a single occurrence, the unfortunate event test should be applied to determine how occurrences are categorized for insurance coverage purposes. The unfortunate event test, in turn, involves a two-part inquiry. First, the court must identify the operative incident giving rise to liability in this factual context. Second, after identifying the operative incident or incidents, the court must consider whether there is a close temporal and spatial relationship between the incidents giving rise to injury or loss, and whether the incidents can be viewed as part of the same causal continuum, without intervening agents or factors.

ANALYSIS

As a threshold matter, the appellate court concluded that the unfortunate event test applies. Earlier federal and state authorities concluded that that the policy language does not evince an intent to aggregate incidents.

Applying the unfortunate event test, the appellate court concluded that the district court did not err in granting summary judgment to the defendants and determining that three separate accidents occurred for purposes of the policy at issue. Under any version of the facts, including one that minimizes the temporal gap between the three incidents, the Second Circuit concluded that the district court properly determined that there were three accidents.

First, regarding temporal proximity, several New York Court of Appeals decisions shed light on the role timing plays in the unfortunate event test. Here, no evidence in the record supports a reasonable inference that the relative timing of any of the incidents played a role in causing the events to unfold as they did. No evidence in the record suggests that the short timespan between the dump box’s collision with the overpass and the Itzkowitz vehicle’s collision with the dump box played any role in the Itzkowitz vehicle’s collision with the dump box.

As for the temporal gap of at least “a few seconds” between the Itzkowitz and Compton–Hershkowitz vehicles’ collisions with the dump box, there is also no indication in the record that timing played a role in the two incidents. For example, there is no indication that the Itzkowitz vehicle’s collision in any way distracted or limited the reaction time of Yosef Compton, the Compton–Hershkowitz vehicle’s driver. Even a few seconds on the highway provides ample opportunity for a vehicle to avoid a collision, and National presents no evidence suggesting that timing might have played a role in causing any of the collisions. In sum, although the incidents occurred close in time, nothing suggests that the narrow timespan between each incident played a role in causing any of the other incidents.

Second, the spatial proximity of the events presents a closer question. The first and second incidents are distinct because they occurred in different locations: The first involved the elevated dump box striking the overpass, whereas the second involved the Itzkowitz vehicle colliding with the stationary dump box farther down the road. The second and third incidents, however, are spatially proximate.

The collisions occurred in virtually identical spots on the highway and involved the same dump box. The unfortunate event test does not dictate that separate incidents are part of the same accident if they meet any one of three criteria—spatial proximity, temporal proximity, or occurrence in a causal continuum. The test reflects a “common sense” balancing of the three elements.

The three incidents here share a common origin: the initial negligence that caused the dump truck’s collision with the overpass. The court looked to whether there was an “unbroken” continuum between the events. To be part of the same accident, the operative incidents must be part of the same causal chain. Once an incident occurs and that incident does not then cause further injury, the causal chain is broken.

Here, the first incident involved the elevated dump box striking the overpass, separating from the dump truck, and landing in the road. That incident was not responsible for the second and third incidents.

The dump box fell off the truck, slid down the road, and then came to a rest in the right lane. Then, after thirty seconds passed, the Itzkowitz vehicle struck the dump box. When the Itzkowitz vehicle collided with the dump box, a second causal chain started, and this chain was distinct from the one that caused the damage to the overpass. Then, the Compton–Hershkowitz vehicle struck the dump box, and this collision was unrelated to the preceding collision involving the Itzkowitz vehicle. The court would face a different set of facts if the third incident involving the Compton–Hershkowitz claimants occurred because of the Itzkowitz collision. The second and third incidents were therefore not part of the same unbroken continuum.

Applying the unfortunate event test, the Second Circuit held that three separate accidents occurred for purposes of the National policy. The damage to the overpass was not temporally or spatially proximate to the Itzkowitz vehicle’s collision with the dump box, and the events were part of distinct causal chains. Additionally, even though there was spatial proximity between the second and third incidents, they too were distinct accidents, both because the second incident did not play a role in causing the third and because the relative timing between the two incidents played no role in the third incident’s occurrence.

ZALMA OPINION

The Second Circuit refused to allow the insurer to limit its liability exposure to the three groups of parties whose property and health were injured because the dump truck’s box hit an overpass and was detached from the truck body. It found three separate incidents that although proximately caused by the the negligence of the dump truck driver, were still three separate accidents thereby tripling the limits available to pay the injured parties.

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on The Unfortunate Event Test Rules

Declaratory Relief Action Without Insured Fails

Federal Court Refuses to Confuse Issue of Insurance Limits

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

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

FACTS

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

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

Settling the Controversy

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

Clarifying the Legal Relations

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Insurance Claims Expert’s Testimony Limited

Claims Expert Can’t Testify About Law

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

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

BACKGROUND

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Courts Will not Strain to Create an Ambiguity Where None Exists

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

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

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

FACTS

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

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

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

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

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

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

DISCUSSION

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Insurance Shouldn’t Be Mentioned To Jury

Keep it Short & Sweet & You Can Still Do It

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

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

FACTS

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

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

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

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

DECISION

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

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

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

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

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

PREJUDICE

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Zalma’s Insurance Fraud Letter – September 15, 2015

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

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

The current issue of ZIFL reports on:

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

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

Proformative Academy

Multiple Continuing Education Presentations

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

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

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

I hope you find them interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

“Insurance Law”

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

New From The American Bar Association

Diminution in Value Damages

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

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

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

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

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

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

Barry Zalma

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

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

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

 

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

Fraudulently Obtained Workers’ Compensation Policy

Rescission Fails Because It Was Brought in Wrong Court

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

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

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

BACKGROUND

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

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

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

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

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

DISCUSSION

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

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

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

DIA’S JURISDICTION OVER COVERAGE DISPUTES

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

EXHAUSTION

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Insurance Coverage Trial Orders

Be Prepared For Trial As Soon as Possible

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

BACKGROUND

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

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

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

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

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

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

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

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

EXPECTED OR INTENDED INJURY EXCLUSION

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

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

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

“LEGALLY OBLIGATED TO PAY” REQUIREMENT

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

VIDEOTAPE OF PROPERTY

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

When Does the Mediation Privilege End?

Privileges Can’t Be Waived in Error

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

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

BACKGROUND

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

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

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

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

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

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

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

LEGAL STANDARD

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

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

Applicability of the Mediation Privilege

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

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

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

Whether Counsel for SST Waived the Mediation Privilege at the CMC

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

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

CONCLUSION

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Buyers Remorse Doesn’t Get You More Coverage

When an Agent Fulfills His Obligation About UM/UIM Coverage

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

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

FACTS

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

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

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

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

What the Heck is a Bumbershoot Policy?

Excess Insurance Limited to Its Terms

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

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

Facts

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

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

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

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

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

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Duty to Report Promptly Is a Condition Precedent

When a Late Notice Defense Is Enforceable

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

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

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

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

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

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

Notice

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

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

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

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

ANALYSIS

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

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

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

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

Coverage

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

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

ANALYSIS

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Theft Is Not “Property Damage”

A CGL Is Not a Cargo Policy

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

FACTS

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

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

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

DISCUSSION

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

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

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

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

Damage to Your Work Exclusion

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

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

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

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

Damage to Property

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Keep it Simple, Stupid

Over-Pleading Makes Insurer Acting in Bad Faith Look Good

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

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

FACTS

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

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

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

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

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

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

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

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

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

ANALYSIS

Breach of Contract

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

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

ICFA Claim

To state an ICFA claim, Wheeler must allege:

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

Fail to Read Your NFIP Policy at Your Own Peril

Agent, Read The Policy Before Advising Insured of its Provisions

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

FACTS

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

Yoder sought summary judgment on all claims against him.

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

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

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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

INSURANCE CLAIMS 101 – A Webinar by Barry Zalma

600px_BarryTop5September 30, 2015 at 2:00pm EDT
Get the Webinar + Book + CE Credit for ONLY $99 at http://www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library/insurance-claims-101.html?utm_source=Zalma&utm_medium=Blog&utm_campaign=ZalmaWebinar

Exclusive $99 Webinar Bundle Offer Includes:

•    1-Hour Webinar presented by Barry Zalma:  Insurance Claims 101
•    Insurance Claims:  A Comprehensive Guide – 2-volume book | 1,648 pages (a $196 value!)
•    CE Credit has been applied for CA, CT, FL, LA, NC, NY, OH, PA, TX, and VA and is pending certification by their respective Departments of Insurance.

1-Hour Webinar Covers:

•    Claims Adjuster Exists for Two Purposes
•    The Claims Adjuster’s Duties
•    The Public Adjuster’s Duties
•    How to Investigate a Claim

240px_InsuranceImage_3

Insurance Claims: A Comprehensive Guide

2015 | Retail Pr

ice: $196 | Paperback | 2-volumes | 1,648 pages
Product Number: 5470000•    Insurance Claims: A Comprehensive Guide delivers comprehensive—yet comprehensible—coverage of every key topic, including:
•    Bad faith
•    Conditions, warranties, and exclusions
•    Declaring a policy void
•    Duties of insured and insurer
•    Evaluation and settlement
•    Identifying insurance fraud
•    Investigation
•    Kinds of insurance policies
•    Other insurance clauses
•    Preparing a case for trial
•    Processing a claim
•    Responses to fraud
•    Subrogation and salvage
•    Underwriting

•    The Covenant of Good Faith and Fair Dealing
•    What are the Grounds for Finding Bad Faith

Learn More and Purchase!

Posted in Zalma on Insurance | Comments Off on INSURANCE CLAIMS 101 – A Webinar by Barry Zalma

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

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

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

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

BACKGROUND

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

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

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

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

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

The State Action is, at present, still pending.

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

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

DISCUSSION

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

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

RIPENESS

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

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

IS THERE A DUTY TO DEFEND?

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

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

Posted in Zalma on Insurance | Comments Off on Does a D & O Policy Have a Duty to Defend?

Zalma’s Insurance Fraud Letter — September 1, 2015

Ethics & The Insurance Fraud Investigation

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

The current issue of ZIFL reports on:

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

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

Proformative Academy

Multiple Continuing Education Presentations

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

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

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

I hope you find them interesting and informative.

ZALMA’S INSURANCE FRAUD LETTER

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

THE “ZALMA ON INSURANCE” BLOG

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

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

NEW FROM NATIONAL UNDERWRITER

Available from the Zalma Insurance Claims Library.

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

Insurance Claims: A Comprehensive Guide

URL:  www.nationalunderwriter.com/InsuranceClaims

“Insurance Law”

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

Mold Claims Coverage Guide

URL:  www.nationalunderwriter.com/Mold

Construction Defects Coverage Guide

URL:  www.nationalunderwriter.com/ConstructionDefects

New From The American Bar Association

Diminution in Value Damages

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

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

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

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

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

The Insurance Fraud Deskbook

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

Barry Zalma

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

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

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

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

Posted in Zalma on Insurance | Comments Off on Zalma’s Insurance Fraud Letter — September 1, 2015

How to Limit Discovery in a Bad Faith Suit

A Plaintiff Can’t See Everything an Insurer Has

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

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

BACKGROUND

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

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

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

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

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

DISCUSSION

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

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

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

ZALMA OPINION

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

ZALMA-INS-CONSULT© 2015 – Barry Zalma

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

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

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

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

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

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

Legal Disclaimer:

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

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