Diminution or Repair Costs

Diminution or Repair

A first party property insurance company is only required to make the insured whole. A property insurer, when the insured decides not to rebuild and sells the damaged property without repair, is only entitled to recover the actual cash value loss. It is not entitled to the costs of repair unless the cost of repair is less than the actual cash value loss. Some insureds attempt to profit from an insured loss rather than take the actual cash value loss it agreed to when the policy was acquired.

3140 L.L.C., attempted to have its cake and eat it, sued its insurance company following water damage from a fire sprinkler in a building it owned. 3140 L.L.C. argued the insurance company was negligent or negligently represented that it needed to maintain a working sprinkler system. A jury awarded 3140 L.L.C. $351,784.58 in damages on its claims. The district court vacated the verdict, set aside judgment, and ordered a new trial. In 3140 L.L.C v. State Central Financial Services, Inc., D/B/A State Central Insurance, No. 2-1186 / 12-0434 (Iowa App. 02/13/2013) the Iowa Court of Appeal resolved the dispute.

BACKGROUND FACTS

In December 2004, 3140 L.L.C. purchased property in Keokuk that had been used as a nursing home. They paid $286,000.00 for the property. In 2007, 3140 L.L.C. purchased an insurance policy on the property through State Central Insurance (State Central). The policy, issued by Mount Vernon Insurance Company (Mount Vernon), did not provide coverage for fire sprinkler leakage.

In November 2007, 3140 L.L.C. was advised as to the necessity of maintaining a fire sprinkler in its vacant property.

On December 23, 2008, the building owned by 3140 L.L.C. incurred damage after water pipes and fire sprinklers froze and broke. 3140 L.L.C. made a claim for damages with Mount Vernon but was denied because the policy did not provide coverage for damage due to sprinkler leakage. The disputes about coverage were resolved by a partial grant of summary judgment. Two claims went to trial: one count of negligence and one count of negligent misrepresentation stemming from State Central allegedly providing inaccurate information about maintaining a working sprinkler system.

After trial a jury reached a verdict in favor of 3140 L.L.C. in the amount of $351,784.58, but found 3140 L.L.C. was forty percent at fault. Reducing the total damages by forty percent, the district court entered judgment on behalf of 3140 L.L.C. in the amount of $211,071.74.

State Central moved for judgment notwithstanding the verdict and for a new trial. Following a hearing, the district court vacated the verdict, set aside the judgment entry, and granted a new trial.

ANALYSIS

The district court determined that instruction No. 29 was inadequate because it lacked an explanation or definition of “fair market value.” The court noted that State Central did not object to the instruction, but that it initially offered a different instruction that included a definition of “fair market value.” The court concluded that it “could have prepared a better instruction by including a definition of fair market value.” However, the court made this finding after determining the jury’s verdict was contrary to the instruction. The only question on appeal was whether the jury’s verdict conformed with the evidence and the law as instructed.

Instruction No. 29 states:

“If you find that Plaintiff is entitled to damages, you will consider either ‘diminution in value’ or ‘restoration.’

“Damage for diminution in value is the difference in the value of the property immediately before the injury and its value immediately after the injury.

“Damage for restoration is the reasonable cost of repairing the property by restoring it to the condition it was immediately before the injury plus the reasonable value of the use of the property for the time reasonably required to complete its repair.

“If the cost of restoration is greater than the diminution in value, the Plaintiff is limited to recovering only the amount of damages for diminution in value.”

“There is an exception to this limitation if:

“1. The cost of restoration is not unreasonably greater than the diminution in value; and

“2. The Plaintiff retains the property because it is personal to the Plaintiff, and the property will actually be restored to its original condition.

“If these propositions are proved by the Plaintiff, damages may be awarded for restoration even if it is greater than the amount of the diminution in value. If these propositions are not proved by the Plaintiff, then the damage award is limited to the amount of diminution in value.”

The district court found the substantial evidence presented at trial was that diminution would result in damages between $0 and $115,000, whereas “the cost of repairing the property by restoring it would amount to $351,784.” Because the jury found the total amount of 3140 L.L.C.’s damages was $351,784.58, the trial court concluded the jury chose to use the cost of restoration, which was contrary to the instruction because the cost of restoration was more than the diminution in value.

The court of appeal concluded that the exception set forth in instruction No. 29 was not followed. Fixing the amount of damages is a function for the jury; therefore, a court is always loath to interfere with a jury’s verdict. When reviewing an allegation that a jury verdict is excessive, the evidence is viewed in the light most favorable to the plaintiff.

A jury award must be reduced or set aside only if it is

  1. flagrantly excessive or inadequate;
  2. so out of reason as to shock the conscience;
  3. a result of passion, prejudice, or ulterior motive; or
  4. lacking evidentiary support.

Where a verdict meets this standard or fails to do substantial justice between the parties, the court must grant a new trial or enter a remittitur.

In 3140 L.L.C.’s closing argument, its attorney told the jury that the amount of damages attributable to the fire sprinkler leak would be between the difference in value of the building before the damage ($590,000) and the amount it sold for after the damage ($475,000)-a difference of $115,000-and the cost of restoration, which was $347,500. The jury found 3140 L.L.C. suffered $351,784.58 in damages, an amount in keeping with the cost of restoration. This is contrary to instruction No. 29, which required the jury to award damages for the diminution of value if that amount was less than the cost of restoration.

The undisputed evidence shows the diminution in value would be between the fair market value of the building prior to the damage and what it was sold for after the damage. The evidence places the fair market value of the building before the damage at either $475,000-the November 12, 2008 offer price – or the value estimate of $590,000. The difference then would be either $0 or $115,000, depending on which figure the jury chose.

The court of appeal concluded that an award of damages between $0 and $115,000 was supported by the evidence. The jury’s verdict of $351,784.58 was not supported by the evidence or the law. Where a verdict is the result of passion and prejudice, a new trial is warranted. However, where in the absence of passion and prejudice the verdict is merely excessive because it is not supported by sufficient evidence, justice may be effectuated by ordering a remittitur of the excess as a condition for avoiding a new trial.

The evidence supports an award of damages in the amount of $115,000 less forty percent, or $69,000. The court of appeal, therefore, conditionally affirmed the trial court’s grant of a new trial for excessive damages and conditioned its decision on the plaintiffs, within fifteen days of the issuance of the order must file with the clerk of the district court a remittitur of all damages in excess of $69,000, the judgment shall be reversed. If the plaintiff does not file a remittitur, the district court would be affirmed and a new trial would be granted.

ZALMA OPINION

This is only tangentially an insurance case. It is a damages case. The Iowa court accepted the fact that actual cash value of real property that is not repaired is the fair market value of the property before loss less the fair market value after loss. In this case the plaintiffs suffered real damage to their property, sold it without repair for almost twice what they paid for it, and then had the unmitigated gall to demand the full cost of repair as the damages due from the insurer. The jury agreed to punish the insurer and compel it to pay more damages than it owed.

The trial court and the Iowa court of appeal saw through the error and gave the plaintiffs one of two choices: accept the remittitur and take the money or retry the case knowing that at the next trial the instructions will follow the requirements of the court of appeal so that the chances of getting more damages are slim and there would be a possibility of getting nothing.

© 2013 – Barry Zalma

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

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

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

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

 

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Don’t Sit on Your Rights

No Excuse For Waiting to Sue for 1995 Accident

Steven Pham, representing the estate of the driver of a car involved in a traffic accident, along with the deceased driver’s parents and the five passengers in his car at the time, sought review of the court of appeals’ judgment in Pham v. State Farm Mut. Auto Ins. Co., No. 09CA0768 (Colo. App. May 27, 2010). The Colorado court of appeals affirmed a summary judgment in favor of State Farm on grounds that the plaintiff-petitioners’ claims were barred by the statute of limitations governing underinsured motorist claims. In Steven Pham, As Personal Representative of the Estate of Louis Diep Pham, Deceased v. State Farm Automobile Insurance Company., 2013 CO 17 (Colo. 03/04/2013) the Colorado Supreme Court was called upon to resolve the dispute.

FACTS

Along with a number of other lawsuits, this action for underinsured motorist coverage arose from an automobile accident that occurred in December 1995. A vehicle driven by Louis Diep Pham was struck by a vehicle driven by Erwin Guerra, who later admitted fault. Mr. Pham and all five of his passengers were injured in the accident, and Mr. Pham subsequently died from his injuries.

At the time of the accident, Mr. Guerra, the at-fault driver, was covered for bodily injury by his own automobile liability insurance policy, issued by Allstate Insurance Company, with policy limits of $25,000 per person and $50,000 per accident.

Louis Diep Pham was driving a vehicle owned by Pham Enterprises and insured by State Farm Automobile Insurance Company, with a policy that provided uninsured/under-insured motorist coverage with limits of $100,000 per person and $300,000 per occurrence. Several of the other passengers had separate policies with State Farm on their own vehicles, which also included underinsured motorist coverage, and two of the passengers had excess underinsured motorist coverage with Liberty Mutual Insurance Company. Finally, Mr. Guerra’s employer, the owner of the vehicle he was driving, had a Business Auto policy issued by Hartford Fire Insurance Company, with $1 million in liability coverage.

In February 1996, Stephen Pham, the personal representative for the estate, and the five surviving passengers filed six separate lawsuits against various parties. A month later, State Farm paid $75,000 in underinsured motorist benefits to the estate, and still later that year, all six separate lawsuits were consolidated in the Denver District Court. Guerra and the plaintiffs entered into a Stipulated Confessed Judgment for $1,558,707.78. The plaintiffs accepted $50,000 in liability coverage from Allstate and agreed not to enforce the judgment against Guerra in exchange for Guerra’s assignment to them of any claims he might have against Hartford.

In April 2006, following summary judgment in Hartford’s favor, the federal lawsuit became final, and the stay of the 1998 state claim for underinsured motorist coverage against State Farm expired by its own terms.

The plaintiff-petitioners sued State Farm in March 2008, more than a dozen years after the initial accident and almost two years after their action against Hartford became final, alleging the same claims for relief against State Farm they had advanced in the 1996 and 1998 state actions.

Once again the plaintiffs asserted claims of negligence and loss of consortium against Guerra and claims of breach of contract and bad faith breach of contract for State Farm’s failure to pay underinsured motorist benefits. The trial court granted State Farm’s motion to dismiss the claims against it, concluding that they were barred both by the applicable statute of limitations and by the doctrine of claim preclusion. The court of appeals affirmed the district court’s summary judgment, interpreting the two-year limitations provision of Colorado statutes as running from May 1998, the point at which the plaintiffs received payment from Allstate of the settlement of their underlying bodily injury liability claim against Guerra, notwithstanding their pending action to recover additional liability insurance coverage by Hartford. The court of appeals did not address the claim preclusion issue.

ANALYSIS

Because Guerra clearly had applicable liability insurance, the statute of limitations governed the plaintiff-petitioners’ claim for underinsured motorist coverage only through the provisions of subsection (1)(b), according to which the limitations period for commencing an action or arbitration of those claims was not extended by final resolution of the Hartford case for at least two separate but related reasons.

Subsection (1)(b) permits filing within two years after the insured receives payment of the settlement or judgment on an underlying bodily injury liability claim if, but only if, the insured’s claim was preserved by timely commencing an action against the underinsured motorist on that claim or receiving payment within the time for filing such an action.

The Hartford action failed to result in the payment of any settlement or judgment. Further, even if it had, that action was not an action on the plaintiff-petitioners’ underlying bodily injury claim against the underinsured motorist. It was, rather, an action by the underinsured motorist’s assignees to recover on a claim of the underinsured motorist against a liability insurance carrier.

By timely commencing an action against Guerra on their underlying bodily injury claims, at least some of the plaintiff-petitioners clearly preserved their claims against the underinsured motorist, potentially permitting them to file for underinsured motorist benefits more than three years after accrual of their claims. Under this alternate method of calculation, however, their claims could nevertheless be filed no later than two years after receiving payment of the settlement or judgment on those preserved underlying bodily injury liability claims against the underinsured motorist. In

May 1996, the plaintiffs settled their action against Guerra, the underinsured motorist, for a confessed judgment, payment of the limits of Allstate’s liability coverage, and the assignment of any claims Guerra might have against Hartford, all in exchange for an agreement that the remainder of the confessed judgment could not be enforceable against the underinsured motorist. At that point, the action against the underinsured motorist was settled, and upon payment of Allstate’s liability coverage, the insureds had received payment of the settlement of the underlying bodily injury liability claim against the underinsured motorist, and the two-year period commenced.

In measuring the two-year period from payment of a settlement or judgment, the statute clearly contemplates either a settlement of the claim in lieu of a judgment or a settlement of the judgment against the underinsured motorist.

The plaintiff-petitioners characterize the court of appeals judgment as measuring the two-year period from a partial payment of a settlement or judgment, but the Supreme Court understood the court of appeals to have held merely that payment of the settlement with Guerra disposed of the only claim against the underinsured motorist preserved as required by the statute.

Because the plaintiffs failed to file this action or demand arbitration of their underinsured motorist claim within either three years of the accrual of their cause of action or within two years after receiving payment of a settlement or judgment on an underlying bodily injury liability claim that had been preserved as prescribed by the statute, the Supreme Court had no choice but to affirm the court of appeals.

ZALMA OPINION

This is another case where the greed of the plaintiffs to seek a bad faith judgment against an insurer clouded their judgment and allowed the statute of limitations to run against a party against whom a cause of action might have been successful.

Plaintiffs, by their sloth, and attempt to create a bad faith suit, lost every chance at a multimillion dollar judgment by waiting. Sad. The plaintiffs, of course, are not without a remedy since they can sue the lawyers who failed to file a prompt lawsuit.

© 2013 – Barry Zalma

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

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

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

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

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Surety & Bankruptcy

Surety’s Security is New Value

Surety is a type of insurance where the surety insurer agrees to fulfill a contractual obligation of its insured if, for some reason, the insured fails to accomplish its obligation. Before agreeing to be a surety the surety will invariably obtain security from the obligor in the form of cash or property to secure the obligation. In Re: ESA Environmental v. the Hanover Insurance Company, No. 11-2150 (4th Cir. 03/01/2013) the Fourth Circuit was called upon to determine whether the security deposited by obligor was an avoidable preference such that it should have gone to the bankruptcy trustee for the benefits of all creditors and not to the surety.

The Trustee in bankruptcy of ESA Environmental Specialists, Inc. (“ESA”) appealed from the award of summary judgment by the bankruptcy court to The Hanover Insurance Co. (“Hanover”). The bankruptcy court concluded that ESA’s transfer of $1.375 million to Hanover within 90 days of ESA’s filing a petition for bankruptcy was not an avoidable preference under 11 U.S.C. § 547(b).

FACTS

ESA was an environmental and industrial engineering firm that sought and performed construction projects under contract with the federal government. Pursuant to the Miller Act, ESA was required to obtain and furnish to the government two types of surety bonds as a condition precedent before any contract of more than $100,000 could be awarded for the construction, alteration, or repair of any public building or public work of the Federal Government. These surety bonds functioned to secure ESA’s obligation to complete its contract and pay its vendors and subcontractors.

In April 2007, ESA borrowed $12.2 million from Prospect Capital Corp. (“Prospect”) to, among other things, meet current working capital needs, repay existing indebtedness, and “fund costs associated with entering into and fulfilling government contracts.” In May 2007, ESA asked Hanover to issue additional surety bonds (the “New Bonds”) in conjunction with seven additional government contracts that ESA sought to obtain (the “New Contracts” and collectively with the Existing Projects, the “Government Contracts”). ESA could not commence work on the New Contracts until it tendered the New Bonds to the appropriate government agencies, as the New Bonds were a condition precedent to the final contract award to ESA. Hanover, concerned about ESA’s financial stability, would not issue the New Bonds without additional security over and above the bond premiums.

ESA was required to obtain an irrevocable letter of credit from SunTrust Bank (“SunTrust”) in the amount of $1.375 million with Hanover as the beneficiary (the “Letter of Credit”). The Letter of Credit would collateralize the New Bonds but also all of Hanover’s existing guarantees and surety obligations on behalf of ESA. The bond premiums on the New Bonds totaled $74,624, and the face value of the New Bonds totaled $7.9 million.

As a condition precedent to issuance of the Letter of Credit, SunTrust required ESA to fund a certificate of deposit at SunTrust in the amount of $1.375 million (the “CD”) as security for the Letter of Credit. ESA had limited cash reserves, so it turned to Prospect for the additional capital necessary to fund the CD. Prospect and ESA then amended their existing credit agreement to increase the principal amount of Prospect’s existing loan to ESA by a total of $1.575 million (the “Prospect Loan”). On May 8 and May 17, 2007, in two separate transfers, Prospect tendered the Prospect Loan funds directly to ESA, and ESA deposited those funds into its bank account. On May 17, 2007, ESA transferred $1.375 million of the Prospect Loan proceeds to SunTrust to fund the CD to secure the Letter of Credit for Hanover. SunTrust then issued the Letter of Credit, and Hanover in turn issued the New Bonds, which ESA delivered to the appropriate federal government agencies for final award of the New Contracts.

Despite being awarded the New Contracts, ESA’s financial condition continued to deteriorate and it filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Western District of North Carolina on August 1, 2007. Hanover then drew on the Letter of Credit, receiving the $1.375 million face amount from SunTrust, which liquidated the CD. Later the bankruptcy was changed to Chapter 7.

In the course of ESA’s bankruptcy proceeding, the bankruptcy court approved the sale of substantially all of ESA’s assets to Prospect. In February 2008, the bankruptcy court entered an order allowing Hanover to take responsibility for the completion of the Government Contracts. Hanover represents, without contradiction, that since entry of that order, Hanover fulfilled its obligations, including ensuring that the Government Contracts were completed and subcontractors paid.

The bankruptcy court, approving the transfer of funds to Hanover, opined that it would be inequitable to require Hanover to return the portion of the Prospect Loan used to cover the costs to complete the Government Contracts when Hanover did the work, and paid the obligations.

ANALYSIS

The “new value” defense is an explicit statutory defense to a § 547(b) preference action:

The trustee may not avoid under this section a transfer –

(1) to the extent that such transfer was –

(A) intended by the debtor and the credi- tor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and

(B) in fact a substantially contemporaneous exchange.

The statute defines “new value” as money or money’s worth in goods, services, or new credit, or release by a transferee of property previously transferred to such transferee in a transaction that is neither void nor voidable by the debtor or the trustee under any applicable law, including proceeds of such property, but does not include an obligation substituted for an existing obligation. The party asserting the new value defense (Hanover, in this case) bears the burden of proof.

As to the new value defense element of intent to make a contemporaneous exchange, the Trustee does not dispute that ESA and Hanover intended the $1.375 million transfer to be a contemporaneous exchange for new value in the form of the New Contracts.

The Trustee did not contest that the New Contracts have value – claiming that the measure of value of these contracts is the expectation of the parties at the time of the transfer.

Hanover asserted, and the bankruptcy court agreed, that ESA received new value in the form of the New Contracts as a result of the transfer of funds (from Prospect to ESA to SunTrust to Hanover). In finding that the New Contracts constituted new value in excess of the transferred asset, the $1.375 million cash, the bankruptcy court relied on the affidavit of ESA’s former Chief Executive Officer, Charles Jacob Cole, (the “Cole Affidavit”) who stated that the “government contracts awarded to ESA had a face amount in excess of $3.9 million and the New Bonds provided ESA with the ability to proceed with the new government contracts and to earn revenues in excess of $1,375,000 – the face amount of the Letter of Credit.” The Trustee failed to introduce evidence to contradict the Cole Affidavit or to establish any other measure of value for the New Contracts.

Once Hanover offered its uncontradicted evidence that ESA received new value in excess of $1.375 million – the amount of the alleged preferential transfer – Hanover did not need to demonstrate any exact figure beyond that amount. Hanover only needed to prove with specificity that the New Contracts had a value at least as great as the amount of the alleged preferential transfer in order to demonstrate that ESA’s bankruptcy estate had not diminished as a result of the transfer. On the record evidence before the bankruptcy court that the value of the New Contracts met or exceeded the amount of the alleged preferential transfer – the $1.375 million – the court did not err in concluding that Hanover had carried its burden to prove with specificity the new value given to the debtor.

ZALMA OPINION

Sureties, unlike insurers, do not just pay money to indemnify the people it insures, they actually step in to the contract that the insured promised to fulfill, manage the work, hire the subcontractors, supervise the work, pay the material men and labor, and effect completion of the contract. This Hanover did as required by its surety agreement. The Trustee, and the creditors the Trustee represented, tried to deprive Hanover of the benefits of the surety contract.

This case teaches that a surety, obtaining security, must make clear the reasons for the security and that it is new value.

© 2013 – Barry Zalma

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

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

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

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

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Failure to Object Terminal Error

Fifth Amendment Should Never Apply to Civil Plaintiff

When a plaintiff sues an insurance company for damages, he places in issue all factual matters relevant to any exclusion clause in that policy including fraud. The gravamen of the lawsuit is so inconsistent with the continued assertion of a privilege as to compel the conclusion that the privilege has in fact been waived. Even so, plaintiff finally may always claim his privilege. To do so, however, will have to dismiss his lawsuit if he persists in asserting the privilege.  A plaintiff suing an insurer cannot assert the Fifth Amendment privilege because he chose to file suit voluntarily and can protect himself by dismissing the lawsuit. He cannot have his cake and eat it too.

In Richard Gay et al. v. Safeco Insurance Company of America, No. AC 33846, (Conn.App. 03/12/2013) the Connecticut Court of Appeal, because of failures of the plaintiff’s counsel to assert the waiver at trial in an attempt to gain a tactical advantage, allowed Gay to have his cake and eat it.

Safeco Insurance Company of America (Safeco) appealed from the judgment of the trial court in favor of the plaintiffs, Richard Gay and Marie Gay (Gays).  Safeco argued that

  1. the court improperly advised Richard Gay, sua sponte, as to his privilege under the fifth amendment to the United States constitution against self-incrimination and
  2. the court abused its discretion by denying Safeco’s motion to compel inspection of the Gays’ home.

FACTS

In 2006 and 2007, the Gays held a homeowners insurance policy with Safeco. Pursuant to that policy, Safeco paid the Gays more than $100,000 in combined benefits for a furnace malfunction and a burst pipe. In February, 2008, the Gays filed a breach of contract action against Safeco alleging that it had failed to pay all covered losses. In February, 2009, Safeco filed a counterclaim alleging fraud, among other things, in connection with the Gays’ insurance claims.

Approximately two months before trial, on March 1, 2011, Safeco filed a disclosure of two expert witnesses, and on March 3, 2011, Safeco filed a motion to compel a reinspection of the home by those two witnesses. The Gays objected, arguing that Safeco already had inspected their home, and that the last-minute inspection by two experts would prejudice the Gays. The Gays argued that they would have to prepare a defense and perhaps find and employ experts of their own within a short period of time. The court denied Safeco’s motion.

The jury trial commenced in May, 2011. Richard Gay was called as the first witness. On cross-examination, counsel for Safeco questioned Richard Gay about his income tax returns and the Gays’ claims. Several times, outside the presence of the jury, the court apprised him of his fifth amendment privilege against self-incrimination. Safeco did not object. In the presence of the jury, Richard Gay claimed his fifth amendment privilege on cross-examination, and he refused to answer a number of questions.

The court instructed the jury that it could draw an adverse inference from Richard Gay’s invocation of the privilege. The jury returned a verdict for Safeco on the Gays’ claim for breach of contract, and the jury returned a verdict for the Gays on Safeco’s counterclaim. Safeco argued, for the first time, that the court improperly advised Richard Gay as to his fifth amendment privilege because he had waived the privilege by testifying on direct examination. The court denied the motions.

ANALYSIS

State Rules control and require that the appellate court shall not be bound to consider a claim unless it was distinctly raised at the trial or arose subsequent to the trial. However, the court may in the interests of justice, notice plain error not brought to the attention of the trial court. The plain error doctrine is reserved for truly extraordinary situations in which the existence of the error is so obvious that it affects the fairness and integrity of and public confidence in the judicial proceedings.

Safeco concedes that it did not object to the court’s advisement at the time it was given during evidence. Rather, Safeco argues that the issue is preserved because it raised the claim in posttrial motions. In the present case, the claim did not arise subsequent to the trial, and Safeco did not raise the issue prior to judgment. Accordingly, the claim was not preserved and the appellate court declined to review it.

Safeco’s argument that the claim qualifies as plain error is similarly unavailing. Safeco presents no reason to believe that the alleged error is so obvious that it would undermine public confidence in the judicial process nor to believe that the verdict is unreliable or a miscarriage of justice.

Furthermore, at oral argument before this court, counsel for Safeco acknowledged that he recognized a “beneficial effect” at the time from Richard Gay’s invocation of the privilege. Safeco enjoyed the tactical benefit of the court’s instruction to the jury that it could draw an adverse inference from Richard Gay’s refusal to answer, and Safeco withheld its objection until after the jury returned a verdict against its interests.

Safeco’s second claim is that the court abused its discretion by denying Safeco’s motion to compel inspection of the Gays’ home. Safeco argues that the court improperly denied the motion in concluding that Safeco had not shown that evidence outside the record was required.

In its brief on appeal, Safeco argues that the inspection was necessary to show the current condition of the property at issue in the case. In sustaining the Gays’ objection, the court stated that Safeco has not shown that it is reasonably probable that evidence outside the record is required. Although Safeco contends that further inspections were required, it concedes that there were prior inspections. The appellate court, therefore, concluded that the court did not abuse its discretion in denying Safeco’s motion to compel inspection.

ZALMA OPINION

The Fifth Amendment is a protection against the government ordering a person to incriminate himself. It is not a weapon that can be used to sue someone else and deprive the defendant of the right to get information necessary for its defense.

In this case Safeco had an absolute defense – if Gay refused to testify about his allegedly fraudulent conduct he would have needed to dismiss his suit or he would have had to testify and by that testimony incriminate himself and lose his lawsuit. Because Safeco failed to object that defense was lost and Gay had his cake and ate it to the point of getting a judgment against Safeco.

A clear understanding of the situation was reasoned out by the California Court of Appeal in Fremont Indemnity Co. v. Superior Court of Orange County, 137 Cal. App. 3d 554, 187 Cal. Rptr. 137 (Cal.App.Dist.4 11/19/1982) where it ordered that if plaintiff still refuses to appear for deposition as ordered to provide the documentary evidence as already ordered, the trial court must entertain and grant defendant’s motion to dismiss plaintiff’s action.

The difference between the Gay case and the Fremont case is that Fremont objected and sought a writ of mandate to protect itself while Safeco wanted the jury told that Gay took the Fifth Amendment.

© 2013 – Barry Zalma

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

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

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

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

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Contribution by Excess Insurers

Vicariously Liable Insured Contributes Last

While working as a pastor for Crosswinds Community Church (Crosswinds) and Christian Evangelical Assemblies (CEA), and while driving his own car, Gary West struck and severely injured Robert Jester, who was riding his motorcycle. Jester and his wife subsequently sued West, Crosswinds and CEA for personal injuries (Jester action).

CEA is a religious organization that trains, licenses and ordains ministers, promotes mission activities, and establishes and oversees churches. Crosswinds is one of the churches operating under CEA’s oversight and control. Gary West was employed by CEA as Crosswind’s pastor.

GuideOne Mutual Insurance Company (GuideOne) sued two other insurers seeking contribution for the Jester action. GuideOne’s insurance policy covered an employee who negligently caused injuries to another person while driving his car in connection with business for his employer, and Utica National Insurance Group and Graphics Art Mutual Insurance Company (collectively Utica), whose policies only covered the driver’s employer. The driver’s employer was only vicariously liable for the actions of its employee. The California Court of Appeal was called upon to resolve the dispute in Guideone Mutual Insurance Company v. Utica National Insurance Group et al, No. D059833 (Cal.App. Dist.4 02/28/2013).

Eventually, protecting their insureds, GuideOne and Utica settled the underlying action, exhausting GuideOne’s primary and umbrella policies. GuideOne thereafter sought and obtained, by summary judgment, contribution in the amount of $600,000 from Utica’s umbrella policy, representing an alleged overpayment by GuideOne based upon its pro rata share of coverage. Utica appealed, asserting that because its umbrella policy covered a party only vicariously liable, it should not share pro rata with GuideOne’s umbrella policy that covered the tortfeasor employee.

FACTS

The Jester action settled for $4.5 million. West’s personal auto insurer, State Farm, paid its $100,000 policy limits. Crosswinds’s insurer, plaintiff and respondent GuideOne, paid its $1 million policy limits on a commercial general auto liability policy. GuideOne also paid its $1 million policy limits on a commercial liability umbrella policy. CEA’s insurers, Utica, paid its $1 million policy limits on a commercial auto liability policy and $1.4 million out of its $5 million policy limits on a commercial liability umbrella policy.

The trial court determined the priority of coverage for the $4.5 million Jester action settlement amongst the five policies was (1) State Farm’s $100,000 policy; (2) GuideOne’s $1 million primary policy and Utica’s $1 million primary policy; and (3) $400,000 from GuideOne’s $1 million umbrella policy and $2 million from Utica’s $5 million umbrella policy, representing the ratio as to the respective coverage held by GuideOne and Utica under those umbrella policies. The court thereafter entered a $600,000 judgment in favor of GuideOne, plus prejudgment interest.

ANALYSIS

Section 11580.9(d) provides: “Except as provided in subdivisions (a), (b), and (c), where two or more policies affording valid and collectible liability insurance apply to the same motor vehicle or vehicles in an occurrence out of which a liability loss shall arise, it shall be conclusively presumed that the insurance afforded by that policy in which the motor vehicle is described or rated as an owned automobile shall be primary and the insurance afforded by any other policy or policies shall be excess.”

The California Legislature enacted section 11580.9 to provide consistency in the allocation of loss between coinsurers and to resolve conflicts and litigation over which of two or more applicable policies providing automobile liability insurance are to be deemed primary or excess. Where applicable, the statutory scheme makes a definitive imposition of primary and/or excess liability on insurers in given situations. When section 11580.9(d) applies any policy which describes or rates the motor vehicle as an “owned automobile” bears primary responsibility for the loss and any other policy is excess.

Because the State Farm policy provided coverage for West’s vehicle as an owned or rated automobile, it is conclusively deemed a primary policy under section 11580.9(d). The GuideOne policies did not specifically identify West’s vehicle. However, they covered West and the vehicle as a non-owned auto. Likewise, the Utica policies did not specifically identify West’s vehicle, but covered CEA for West’s vehicle as a non-owned auto. section 11580.9(d) renders the two GuideOne policies and the two Utica policies excess to the primary State Farm policy.

After concluding that the State Farm policy paid first because it was primary (a point neither party disputes), the trial court had to prioritize the four policies deemed “excess” policies under section 11580.9(d). While section 11580.9(d) establishes that both the GuideOne and both the Utica policies are excess to the State Farm policy, the statute does not provide a method for allocating coverage amongst multiple policies deemed excess by the statute.

all section 11580.9(d) provides is that after the policy held by the driver, all other polices “shall be excess.” It does not address the priority and allocation of the other policies. Given the conclusive presumption provided in section [11580.9(d)], the policy covering the driver is also primary to the employer’s policy. The priority of liability of the remaining policies is not governed by section [11580.9(d)].

A vicariously liable party has the right to pursue indemnity against the primary tortfeasor and/or any insurance policy that covers the primary tortfeasor. Under equitable principles of subrogation the insurer of the employer who has been compelled to pay the judgment against the employer may recover against the negligent employe or the employe’s insurer.  Indeed, under the definition of insured in GuideOne’s policy, CEA is an insured of GuideOne as anyone else who is not otherwise excluded under paragraph b. above and is liable for the conduct of an ‘insured’ but only to the extent of that liability. The reason for this language is apparent. It is to protect and cover those who are only vicariously liable for the actions of an insured under that policy.

Accordingly, the court of appeal concluded that both GuideOne’s primary and umbrella policies must exhaust before Utica’s policies are implicated.

ZALMA OPINION

Although the statute made it easy to determine which insurer is primary and which is excess it did nothing to resolve how more than one excess insurer should contribute to pay a judgment or settlement on behalf of the insured. The court of appeal, recognizing the problem, analogized it to claims for indemnity and found that if there was no insurance in place, the vicariously liable employer would be entitled to indemnity from the employee. Therefore, GuideOne, as an insure that insured the employee, must first exhaust its limits before the insurer for the vicariously liable defendant is required to pay. As a result, it reversed the trial court and adopted the payment schedule originally agreed by the parties.

The three insurers should be commended for taking care of their insured before attempting to resolve the dispute over how to prorate damages. In doing so they showed the essence of good faith and fair dealing.

© 2013 – Barry Zalma

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

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

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

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

 

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Commit Insurance Fraud – Go Directly to Jail

Commit Insurance Fraud – Go Directly to Jail

Continuing with the fifth issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the March 1, 2013 issue on:

1.    How an insurer in New York obtained damages and fees for fraud by an insured;
2.    Why there was no coverage allowed for an arson caused by a manager of a LLC.
3.    An analysis of management of legal fees and why trying to do so is like herding cats.
4.    The disbarment of plaintiffs’ lawyers for using monies received from insurers that belonged to the client.

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

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

The last 18 posts to the daily blog, Zalma on Insurance, are available at http://zalma.com/blog including the following:

Zalma on Insurance

  1.     Pollution February – 28, 2013
  2. Expert Testimony Limited – February 27, 2013
  3.   Rescission is an Ancient Equitable Remedy –  February 26, 2013
  4. Bad Faith Verdict Overturned – February 26, 2013
  5. Insured Must Pay Deductible – February 25, 2013
  6. Reformation Not Allowed – February 22, 2013
  7. No Fraud – February 21, 2013
  8. Deported for Insurance Fraud – February 21, 2013
  9. Accord & Satisfaction – February 20, 2013
  10. New ISO Forms – February 19, 2013
  11. Buyers Remorse – February 19, 2013
  12. Contract of Personal Indemnity – February 18, 2013
  13. Medical Provider Gets Nothing – February 14, 2013
  14. Advertising Injury – February 13, 2013
  15. FIVE YEAR LATE NOTICE – February 12, 2013
  16. Read The Policy – February 11, 2013
  17. Primary v. Excess – February 8, 2013

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

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

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

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

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

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Random Thoughts on Insurance

Random Thoughts on Insurance From Barry Zalma

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

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

Zalma on Insurance was selected as a LexisNexis Top Blogs for Insurance Law – 2011! Top Blogs contain some of the best writing out there on insurance law. They contain a wealth of information for the insurance law community with timely news items, practical information, expert analysis, practice tips, frequent postings, and helpful links to other sites. These blogsites demonstrate how bloggers can impact the world of insurance law.

Half Off — Only $67.50

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

TABLE OF POSTS

There are 268 Separate Posts on subjects of interest to anyone interested in understanding insurance and are listed at http://www.zalma.com/RANDOMTHOUGHTS.htm.

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Pollution

Cooking Grease Can Be A Pollutant

Christopher Roinestad and Gerald Fitz-Gerald, and Tim Kirkpatrick, D/B/A Hog’s Breath Saloon & Restaurant (“respondents”) were overcome by poisonous hydrogen sulfide gas while cleaning a large grease clog in a sewer near the Hog’s Breath Saloon & Restaurant. The district court concluded that Hog’s Breath caused respondents’ injuries by dumping substantial amounts of cooking grease into the sewer. On summary judgment, the district court found Hog’s Breath liable under theories of negligence and off-premises liability, and entered a damage award in respondents’ favor. Mountain States Mutual Casualty Company (“MSM”) sought a ruling that it had no obligation to indemnify Hog’s Breath and the district court agreed holding that dumping substantial amounts of cooking grease constituted a discharge of a pollutant under the policy’s pollution exclusion clause. The court of appeals reversed. It held that the terms of the pollution exclusion clause were ambiguous and that its application to cooking grease could lead to absurd results and negate essential coverage. The parties took the case to the Colorado Supreme Court who, in Mountain States Mutual Casualty Company v. Christopher Roinestad and Gerald Fitz-Gerald, and Tim Kirkpatrick, D/B/A Hog’s Breath Saloon & Restaurant., 2013 CO 14 (Colo. 02/25/2013) resolved the dispute.

FACTS

The Hog’s Breath Saloon discharged enough cooking grease into the sewer system to create a five- to eight-foot clog that led to a dangerous buildup of toxic gas. The conduct violated a city ordinance prohibiting the discharge of a pollutant in an amount that creates an obstruction to the sewer flow. The trial court found that under the circumstances of this case the discharge of cooking grease amounted to a discharge of pollutant. Hog’s Breath caused respondents’ injuries by dumping substantial amounts of cooking grease into the sewer, thereby creating a five- to eight-foot grease clog and consequent build-up of hydrogen sulfide gas.

Mountain States Mutual Casualty Company (“Mountain States”) insured Hog’s Breath. It sought a ruling that it had no obligation to indemnify Hog’s Breath arguing that Hog’s Breath’s conduct fell within the policy’s pollution exclusion clause, which excluded coverage for bodily injury arising out of the discharge of pollutants from the premises of an insured. The policy defined pollutants as any solid, liquid, gaseous, or thermal irritant or contaminant, or waste. The district court agreed with Mountain States, concluding that the pollution exclusion clause was unambiguous and that the dumping of substantial amounts of cooking grease into the sewer constituted a discharge of a pollutant under the policy’s pollution exclusion clause.

The court of appeals reversed. It held that the terms of the pollution exclusion clause were ambiguous and that its application to cooking grease – a common everyday waste product – could lead to absurd results and negate essential coverage.

The negligence per se claims were based on several La Junta city ordinances in effect at the time, including city ordinance 13.12.250(b), entitled “Restricted Discharges to Sewers,” which says,

(b) Substances which are prohibited are:
(3) Solid or viscous pollutants in amounts which will cause obstruction to the flow in the [Publicly Owned Treatment Works (“POTW”)] or other interference with the operation of the POTW.
(5) Pollutants which result in the presence of toxic gases, vapor or fumes within the POTW in a quantity that may cause acute worker health and safety problems.

THE POLICY

After respondents filed the lawsuit, Kirkpatrick notified his liability insurer, Mountain States, who had renewed a commercial general liability policy (the “insurance policy” or “policy”) issued to Hog’s Breath in 2003 that contained a pollution exclusion clause stating,

This insurance does not apply to: ….

f. Pollution

(1) “Bodily injury” or “property damage” arising out of the actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of pollutants:

(a) At or from any premises, site or location which is or was at any time owned or occupied by, or rented or loaned to, any insured; . . .Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Mountain States brought a declaratory judgment action in federal court asserting that it had no duty to defend Kirkpatrick based on the pollution exclusion clause. The federal court found Mountain States had no duty to defend because “under the plain meaning of the words and in the context of the facts and circumstances alleged in the Underlying Lawsuit…. [t]he grease and oil, in the quantities allegedly at issue,” are contaminants and therefore pollutants.

Thereafter, Mountain States did not defend Kirkpatrick and Hog’s Breath. After a one-day trial on damages, respondents obtained a monetary judgment against Kirkpatrick and were awarded costs. Apparently unable to collect from Kirkpatrick, respondents served a writ of garnishment on Mountain States.

ANALYSIS

The question here is whether the pollution exclusion clause at issue excludes the conduct that occurred in this case. Respondents do not dispute that cooking grease was “discharged” from the restaurant in quantities large enough to create the sewer clog, nor do they dispute their injuries “arose out” of such a discharge.

When interpreting an insurance contract, a court must first give effect to the plain meaning of its terms, and only find ambiguity where a term is reasonably susceptible to more than one meaning. While a resident of La Junta who dumps an occasional pan of greasy water into a sewer may not contaminate and therefore not pollute the sewer, a restaurant that repeatedly dumps large amounts of cooking grease or greasy water into a sewer over time, thereby creating a five- to eight-foot clog, is dumping contaminants (and thus pollutants as defined by Mountain States’ insurance policy) into La Junta’s sewers.

Respondents seek to avoid this conclusion by invoking the reasonable expectations doctrine. They claim that pollution exclusion clauses were incorporated in commercial liability policies to relieve insurers of liability for clean-up and other costs associated with federal environmental protection laws such as the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”). From this, they argue that a reasonable insured would expect pollution exclusion clauses to exclude coverage only for “traditional” pollution as contemplated by CERCLA, not cooking grease..

The reasonable expectations doctrine may override exclusionary policy language, where an ordinary, objectively reasonable person would be deceived into believing that he or she is entitled to coverage, while the insurer would maintain otherwise.

The pollution exclusion clause in the policy says nothing about federal environmental protection laws, or “traditional” pollution. Instead, the policy uses general language to exclude coverage for discharges of waste or substances that irritate or contaminate. The dumping of large quantities of cooking grease into the sewer such that a clog would form would run afoul of at least one city ordinance should not cause an ordinary person to read the pollution exclusion clause to exclude “traditional” pollution but preserve coverage for conduct that violated a city ordinance prohibiting the discharge of “solid or viscous pollutants in amounts which will cause obstruction to the flow.”

The Supreme Court reasoned that an ordinary reasonable person would not have been “deceived” into thinking that there would be coverage for the dumping of cooking grease in such a great volume as to clog the sewer. Respondents, in addition, produced no facts in this case to suggest such deception.

The court of appeals based its decision on its concern that because cooking grease is a common everyday waste product, considering it to be “pollution” would lead to the negation of essential insurance coverage and absurd results. While the Supreme Court was mindful of the concerns expressed by the court of appeals, it fond them inapplicable because, in this case, the restaurant discharged enough cooking grease into the sewer system to create a five- to eight-foot clog that led to a dangerous buildup of toxic gas – conduct that violated a city ordinance prohibiting the discharge of a pollutant in an amount that creates an obstruction to the sewer flow.

The Supreme Court, therefore, agreed with the trial court that, under the circumstances of this case, the discharge of cooking grease amounted to a discharge of a pollutant. Concluding that the pollution exclusion clause bars coverage, and the insurance policy cannot be garnished to compensate respondents for their bodily injuries, the Supreme Court reversed the decision of the court of appeals.

ZALMA OPINION

Insurance policies are contracts that require interpretation with reason. Those who write insurance policies, and courts that interpret them, expect insurance contracts to be interpreted reasonably with common sense. Snake venom, for example, is a deadly poison that would seldom be considered medicinal. However, when injected into the facial tissue of an aging person it can tighten the skin and make the person look younger without harm.

Used bacon grease is healthful and often used to increase the flavors of other food products. However, when dumped improperly into a sewer where it builds up an eight foot clog and mixed with the sewer water creates toxic gas is clearly a pollutant. The Supreme Court of Colorado, intelligently, interpreted the insurance policy to provide meaning to its clear and unambiguous terms. Insurance covers many risks of loss but can never cover every possible risk of loss.

© 2013 – Barry Zalma

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

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

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

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

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Rescission is an Ancient Equitable Remedy

 Zalma on Rescission in California  2013

California is the biggest insurance market in the United States. California is, as a result, the home of more insurance fraud than any other state.

Insurers in California have the right to rescind a policy of insurance if the insured misrepresents or conceals a material fact when seeking insurance. California, more than a century ago, adopted, and codified, the ancient Marine Rule with regard to the interpretation of insurance contracts created as a result of misrepresentation or concealment of a material fact allowing rescission even if the concealment or misrepresentation was innocent or unintentional.

The California Court of Appeal stated the basis for rescission:

“An insurance company has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.” (Emphasis added) Robinson v. Occidental Life Ins. Co. (1955) 131 Cal.App.2d 581, 586.

California lawyer, expert witness and insurance consultant, Barry Zalma, has updated the only detailed resource on the remedy of rescission of insurance in California with the addition of more than 130 pages of new and updated material. In 934 pages Mr. Zalma provides the full text of almost every statute and decision of the California courts of appeal and federal courts that deal with rescission of California insurance policies in his new E-Book Zalma on Rescission of Insurance in California – 2013.

The new E-Book is published in Adobe Acrobat pdf format. Any person with a computer, I-Pad, smart phone, or book reader that can read the universal pdf format can read the book and search the entire book for key words using the Adobe Reader search function.

In the U.S., courts of law were charged with enforcing legitimate contracts and courts of equity were charged with protecting contracting parties from mistake, fraud, misrepresentation and concealment since enforcing a contract based on mistake, fraud, misrepresentation or concealment would not be fair.

Insurance contracts, unlike common run-of-the-mill commercial contracts, are considered to be contracts of utmost good faith. Each party to the contract of insurance is expected to treat the other fairly in the acquisition and performance of the contract. For example, the prospective insured is required to answer all questions about the risk he, she or it are asking the insurer to take and about the person the insurer is asked to insure.

Rescission, since before the U. S. Constitution, was an important remedy for insurers. As a contract of utmost good faith insurers and the courts recognized that the parties to a contract of insurance were more vulnerable than other contracting parties to misrepresentation or concealment of material fact. The remedy is available to either party to the contract and when one determines it was deceived into entering into the contract it may declare the contract void from its inception, return the consideration and treat it as if it never existed.

When an insurer or the insured discovers the existence of a factual basis for rescission they have the opportunity, but not the duty, to exercise the remedy of rescission. In California the remedy is available to both parties to the contract of insurance whether the party deceived believes the deceit was the result of a fraud or an innocent misrepresentation of a material fact. To do otherwise would be to make a gift to the person who deceived the insurer of rights not available to the truthful.

Equitable remedies, like the remedy of rescission, must be fair. The ancient maxim that “No one can take advantage of his own wrong” is applied when a court is faced with a request to confirm rescission.

California first enacted state statutes relating to insurance and the equitable remedy of rescission at the turn of the 20th Century. Those statutes remain basically unchanged today. The California Supreme Court and courts of appeal have consistently enforced the right of insurers to rescind policies of insurance even if the facts misrepresented or concealed were made innocently and without an intent to deceive.

Although the plaintiffs’ bar has tried to emasculate the rescission remedy based on the semi-fiduciary relationship between the insurer and insured, rescission of insurance contracts, as an equitable remedy, is effective and continues to be enforced by California courts when evidence establishes that the insurer was deceived and would not have agreed to the insurance with the same coverage or at the same price had it known the true facts.

To effectively rescind a policy of insurance insurers faced with an application that appears to contain false representations that would have been material to the decision to insure or not insure the insurer, must before deciding to rescind, complete a thorough investigation into the formation of the policy of insurance.

Insurers should never assume that the promise to pay indemnity to the insured under a policy of insurance can, with impunity, be broken by advising the insured that the insurer has rescinded the policy. Proof, beyond a preponderance of the evidence, must be able to show that the person(s) insured misrepresented or concealed a fact that the insure contends was material to the decision to insure or not insure. The insurer must also prove materiality, a subjective conclusion of the person who agreed to the insurance, that had that person, an underwriter, known the true facts the insurance would not have been issued on the same terms and conditions or for the same premium.

The E-book Zalma on Rescission of Insurance in California – 2013, provides the insurance professional with the information needed to understand why an insurer will decide to use the remedy, how to obtain sufficient facts to exercise the remedy, and what is needed to avoid the need to exercise the remedy.

Rescission without sufficient evidence is wrongful. Rescission without the advice of competent counsel is a tactic fraught with peril. Where no valid ground for rescission exists, the threat or attempt to seek such relief may constitute a breach of the covenant of good faith and fair dealing which is implied in the policy and expose the insurer to tort damages for that breach, including punitive damages.

California courts have made clear that if an insurer elects rescission without sufficient evidence it will bring the wrath of the courts down on it and will be the basis for allegations of extra-contractual torts.

After you make a payment through PayPal, please wait for the E-Book to upload to your machine.  If you have a problem with the purchase please write to me at zalma@zalma.com

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Bad Faith Verdict Overturned

No Bad Faith for Lack Of Producing Cause

The Fifth Circuit Court of Appeal was asked to determine whether an insurer breaches a duty to its insured in Texas by surreptitiously attempting to settle a covered third-party claim and truncating its duty to defend, despite paying the full limits of its coverage in Mid-Continent Casualty Company v. Eland Energy, Inc.; Sundown Energy LP, No. 11-10649 (5th Cir. 02/22/2013).

ALLEGATIONS

According to appellant Sundown, Mid-Continent Casualty Company (“Mid-Continent”) prematurely tendered the limits of Sundown’s primary and umbrella policies ($6 million total) while undercutting Sundown’s ability to defend a class action suit for environmental damage following Hurricanes Katrina and Rita.

After extensive litigation, the district court overturned a jury verdict for Sundown and awarded Mid-Continent judgment as a matter of law.

BACKGROUND

Sundown’s oil and gas production facilities in Louisiana were destroyed and tanks containing crude oil spilled their contents after Hurricane Katrina hit Port Sulphur. Less than a month later, the storm surge from Hurricane Rita caused that oil to escape a containment boom constructed during Hurricane Katrina cleanup operations.

Sundown held a commercial general liability policy (“Primary Policy”) and an Umbrella Policy through Mid-Continent Casualty Company. The Primary Policy had coverage limits of $1 million per occurrence and $2 million total, and included a duty to defend. The Umbrella Policy had a total limit of $5 million and included a right to associate with an underlying insurer and the insured to defend.

Five lawsuits were filed against Sundown by neighboring property owners and commercial fishermen affected by the spillage of oil.

Mid-Continent filed suit for a declaratory judgment that it had no further duty to defend, and Sundown filed a cross-claim for breach of the duty of good faith and fair dealing, among other cross-claims. In three opinions, the district court granted Mid-Continent the declaratory relief it sought and judgment on several of Sundown’s claims. Sundown’s counterclaims were tried to a jury, which returned a verdict partially in favor of Sundown and awarded Sundown a total of $8.45 million in compensatory, penalty, and punitive damages. Mid-Continent sought judgment as a matter of law. The district court granted Mid-Continent’s motion, overturning the jury verdict.

Sundown’s appeal turns on actions taken by Mid-Continent, including a secret offer of settlement made to Chris Leopold, which it says prejudiced its ability to settle the Blanchard class action.

What followed next in the claims handling Sundown succinctly characterizes as “the extreme acts of Mid-Continent with respect to Leopold-the secret visit, secret investigation, secret sampling and secret offer” that consciously undermined Sundown’s defense of the Blanchard case.
Mid-Continent began putting together a settlement offer by obtaining a cleanup estimate from Greco Construction (“Greco”). Greco’s estimate was $98,560, but Mid-Continent subtracted the portions of the estimate that did not cover debris removal that was later performed by the government without charge. This brought the estimate to $54,536, and Mid-Continent alleges it made a written settlement offer of that amount to Leopold on June 2, 2006. Leopold testified that he “never got an offer in writing” and that an oral offer of “somewhere around a hundred thousand dollars” had been made, but that he rejected the offer.

In July, Mid-Continent informed Sundown that it had extended a settlement offer to Leopold. When asked why Mid-Continent did not tell Sundown about the settlement offer at the June 16 meeting, Mid-Continent Vice President Steve Haltom replied that he “didn’t think it was important.” Sundown demanded Mid-Continent withdraw the offer. Mid-Continent did so that day, and Leopold promptly became a member of the Blanchard class action.

Sundown settled the Blanchard litigation for $2 million and an agreement to remediate any Sundown oil found on any class member’s property. Sundown paid for the settlement, as Mid-Continent had already tendered policy limits and withdrawn from the defense. Sundown believed the settlement would have been smaller had an offer not been made to Leopold.

DISCUSSION

Sundown contends Mid-Continent breached an insurer’s common law duty of good faith and fair dealing. To prevail, Sundown must show that Texas law recognizes a cause of action for an insurer’s mishandling of third-party claims. Under Texas law, an insurer owes a duty of good faith in handling its insured’s own claim of loss. Sundown sought coverage, however, for a third-party claim covered by its comprehensive general liability policy.

There exists no statutory cause of action for breach of the duty of good faith and fair dealing in the context of an insurer’s handling of a third-party claim. The only previously recognized common law claim is for breach of the duty to settle a third-party claim within policy limits.

Sundown’s claim is inextricably tied to Mid-Continent’s mishandling of a third-party claim under the insurance policies and Mid-Continent’s motive to minimize its costs associated with the policies. In this case the “extreme” acts were subsumed within the claims-handling process, and they did not inflict injury independent from the policy claim.

JURY FINDING

The jury found that Mid-Continent committed five separate violations of the Texas Insurance Code, and it awarded $2 million compensatory damages for Sundown’s alleged injury in settling the Blanchard case. The district court granted judgment as a matter of law for Mid-Continent on all of these claims. On appeal, Sundown defends the verdict only as to two: Mid-Continent’s failure to give a prompt and reasonable explanation for the Leopold settlement offer, Tex. Ins. Code § 541.060(a)(3); and Mid-Continent’s four misrepresentations of material facts, Tex Ins. Code § 541.060.

The parties dispute whether the trial court correctly overturned the verdict finding that Mid-Continent delayed too long and then failed reasonably to explain its settlement offer to Leopold in July, 2006.

THE MISREPRESENTATIONS

Mid-Continent did not challenge the finding of four material misrepresentations presented to the jury:

  1. Mid-Continent misstated the law to Sundown when it denied that a conflict of interest was created by its reservation of rights letters;
  2. Mid-Continent misrepresented that it did not pay more than $200/hour for Louisiana attorneys (and hence would not pay more for Sundown’s separate counsel);
  3. Mid-Continent misstated that there was no coverage for Hurricane Katrina costs at Sundown’s facility unless Sundown obtained a written order from the Coast Guard; and
  4. Mid-Continent misstated the law when it maintained it had an unavoidable duty to investigate the Leopold claim.

The district court held as a matter of law that none of these unfair settlement practices was a producing cause of Sundown’s injury in the amount of the Blanchard settlement.

LACK OF PRODUCING CAUSE

A producing cause is an efficient, exciting, or contributing cause, which in a natural sequence, produced the injuries or damages complained of, if any. Producing cause requires a lesser burden than proximate cause because it does not require foreseeability.

There must, however, be a showing of cause in fact, which requires evidence that allows the fact finder to reasonably infer that the damages are a result of the defendant’s conduct. The plaintiff must show an unbroken causal connection between the alleged misrepresentation and injuries suffered by the complaining party.

To defeat the district court’s ruling, Sundown needed to successfully tie at least one misrepresentation by Mid-Continent to the increased settlement amount and establish that it was a producing cause.

It is not enough to merely show that Mid-Continent was a bad actor. Sundown argued extensively that without attempting to tie the misrepresentations found by the jury to the increased settlement. Instead, Sundown argued that it was injured by the Leopold offer and related actions, none covered by the jury’s misrepresentation findings, that led to inflated expectations and the inflated Blanchard settlement.

The evidence failed to establish that any of MidContinent’s misrepresentations were the producing cause of an increased settlement for the Blanchard litigation.

The Fifth Circuit concluded that, applying Texas law, an insured has no claim for bad faith premised on the insurer’s investigation or defense of a claim brought against it by a third party. This is because an insured is fully protected by his contractual rights.

ZALMA OPINION

Every liability insurance policy I have read in the last 45 years gives the right to the insurer to enter into any settlement it can justify as long as it does not deprive the insured of the right to defense and indemnity. In this case the settlement occurred within the available policy limits.

Although MidContinent acted with less than professional manner sufficient to be called a “bad actor” by the Fifth Circuit, its bad conduct and lack of professional claims handling was not a producing cause of the injuries claimed by Sundown and, therefore, the windfall exemplary damages jury verdict evaporated like snow falling in the Sahara at noon.

© 2013 – Barry Zalma

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

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

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

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

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Zalma on California SIU Regulations

Zalma on California SIU Regulations

Zalma On California SIU Regulations is an e-book designed to assist California insurance claims personnel, claims professionals, independent insurance adjusters, special fraud investigators, private investigators who work for the insurance industry, the management in the industry, the attorneys who serve the industry, and all integral anti-fraud personnel working with California admitted insurers to comply with the requirements of California SIU Claims Regulations.

By statute, the state of California requires all admitted insurers to maintain a Special Investigative Unit (an “SIU”) that complies with the requirements set forth in the Special Investigative Unit Regulations (the “SIU Regulations”) and that the insurer must train all integral anti-fraud personnel to recognize indicators of insurance fraud. Since almost every employee of an insurer who approaches a claim qualifies as “integral anti-fraud personnel” they must all be trained annually.

It is necessary, therefore, that insurance personnel who are engaged in any way in the presentation, processing, or negotiation of insurance claims in California be familiar with the SIU Regulations imposed by the state on all insurers doing business in the state and be in a position to prove to the California Department of Insurance that the SIU Regulations have been complied with and all integral anti-fraud personnel have been trained.

In addition to explaining the SIU Regulations the appendix contains an outline for the training required.

You can purchase the e-book at http://www.zalma.com/zalmabooks.htm.

 

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Insured Must Pay Deductible

No Excuse for Failure to Read Policy

Liability insurance policies often contain deductibles or Self Insured Retention (“SIR”) amounts to limit the premium by making the insured responsible for the first amount of a loss and remove from the insurer the obligation to defend and indemnify the insured from small claims. Insureds enter into such agreements with pleasure because of the premium savings only to balk when a claim arises and they find they must pay the lawyers to defend the claim and indemnify the injured up to the amount of the deductible or SIR.

The Supreme Court of Mississippi was called upon to resolve a dispute when insureds filed suit against their insurers claiming they were unaware their insurance policy had a $250,000 per-claim deductible. The insureds also alleged that the insurer breached its insurance contract by refusing to provide a defense until the insureds paid the $250,000 deductible for each of five separate claims. The circuit court granted summary judgment for the insurers and the insureds appeal in Southern Healthcare Services, Inc v. Lloyd’s of London A/K/A Underwriters, No. 2011-CA-01833-SCT (Miss. 02/21/2013).

FACTUAL BACKGROUND

Daleson Enterprises, LLC (“Daleson”) operated Jones County Rest Home in Ellisville. Medforce Management, LLC (“Medforce”) operated Willow Creek Retirement Center in Byram. Southern Healthcare Services, Inc. (“Southern Healthcare”) managed both Daleson and Medforce. Southern Healthcare purchased professional and general liability insurance from Lloyd’s of London (“Lloyd’s”) to cover Daleson, Medforce, and others. Southern Healthcare was the first named insured on the policy. Southern Healthcare, Daleson, and Medforce will be referred to collectively as the “Insureds.”

The Insureds contend the Fox-Everett agent informed them their new policy had a higher premium and lower policy limit. Otherwise, the Insureds believed their new policy was identical to the previous one. In fact, the policy had a $250,000 per-claim deductible. The Insureds claim Fox-Everett failed to inform them about the different deductible. They also claim they did not receive a copy of the policy until eleven months after the purchase. The policy was renewed in October 2003. Again, the Fox-Everett agent informed them that the premium was going up, but the Insureds claim the agent said nothing about the $250,000 deductible.

In 2003 and 2004, various plaintiffs filed five lawsuits against the Insureds. When each civil action arose, the Insureds notified Lloyd’s in accordance with the policy terms. Caronia Corporation (“Caronia”) acted as the third-party administrator for Lloyd’s, and Caronia sent a reservation of rights (“ROR”) letter to the Insureds acknowledging receipt of each claim. Via the ROR letters, Caronia informed the Insureds that “Lloyd’s would not provide coverage under the policies until the $250,000 deductibles were paid in full.”
The ROR letters were standard communications that included claim information, acknowledged receipt of the lawsuit, stated that indemnification and defense would be provided, and set forth any issues that would not be covered under the policy or that would be defended under a reservation of rights. The letters provided the name and contact information of the attorneys Lloyd’s had hired to defend the Insureds. Each letter included the following language about the deductible:

As you are aware, Southern Healthcare Services, Inc., d/b/a Jones County Rest Home [Willow Creek Retirement Center] has a $250,000 deductible for each and every Professional Liability claim. Therefore, the first $250,000 of indemnity and/or claims related expenses will be paid directly by Southern Healthcare Services, Inc., d/b/a/ Jones County Rest Home [Willow Creek Retirement Center].

Caronia sent the ROR letters directly to the nursing homes, rather than to Southern Healthcare. Daleson and Medforce initially paid the attorneys directly until the dispute arose over the deductible.

ANALYSIS

Whether the Trial Court’s Grant of Summary Judgment on the Insureds’ Claims Against Lloyd’s and Caronia Was Proper.

The trial judge granted summary judgment in favor of Lloyd’s and Caronia, finding the two entities had performed their duties under the contract and no dispute of material fact existed. The Insureds were ordered to reimburse Lloyd’s in the amount of $701,153.54 for defense costs and settlements that fell within the per-claim deductible.

Whether the Insureds Were Subject to the Deductible.

Insurance policies are contracts, and where the terms of an insurance policy are ambiguous, the rules of contract interpretation and construction will be applied. A court must effect a determination of the meaning of the language used, not the ascertainment of some possible but unexpressed intent of the parties. Pursuant to the policy, the Insureds bore responsibility for a $250,000 deductible on any general or professional liability claim, and defense costs were to be included in that amount. Specific terms pertaining to the deductible were found throughout the policy.

According to the terms set forth in the policy, taken together and read as a whole, the Supreme Court found that the Insureds were subject to the deductible, and the Insurers’ duty to provide coverage for damages applied after the deductible was met.

The insureds received a copy prior to renewing the policy in 2003, and the 2003 policy is the one at issue. Therefore, even if the Insureds did not know about the deductible the first year, by the time they renewed the policy in 2003, they had a copy of it, and they should have known about the deductible before they renewed. In light of the numerous references to the deductible throughout the policy, with several pages referencing the deductible signed by the Insureds, the Insureds cannot argue that they were unaware of the deductible when they renewed the policy in 2003.

Under Mississippi law, a contracting party is under a legal obligation to read a contract before signing it, and a person is charged with knowing the contents of any document that he executes. Where one has a duty to read a contract before signing it, he will not be heard to complain of an oral misrepresentation the error of which would have been disclosed by reading the contract. Therefore, as a matter of law, the Supreme Court had no choice but to presume that the Insureds read the policy and saw the terms setting forth the $250,000 deductible.

Whether the Insurers Fulfilled Their Duties under the Contract.

The Insureds argue that the trial court’s grant of summary judgment was improper because Lloyd’s breached its contractual duties under the policy, as well as its fiduciary duties of good faith, fair dealing, and reasonable care by conditioning coverage on payment of the deductible.

As with any deductible, the insured is required to expend the amount of the deductible before coverage becomes available. An insurer’s duty to indemnify is not triggered until the deductible has been paid. The purpose of a deductible is to shift some of the insurer’s risk (that is, covered risk) to the insured, which is accomplished by setting a limit on the value of covered losses below which the insurer is not obligated to pay. An SIR is just what its name implies, a form of self insurance. In this case, the policy states that defense costs are included in the deductible. So the deductible here operates more like a SIR, and the Insurers have no duty to pay for the defense until the deductible is exhausted.

The Insurers did not breach any contractual or fiduciary duties to the Insureds. The Insurers did not deny coverage as the Insureds contend. The Insurers exercised their right to provide a defense while reserving their right to deny coverage for claims that may not be covered under the policy. They also exercised their right under the policy to advance part of the deductible amount to settle the claims. In fact, all of the claims were settled or dismissed between December 2006 and August 2007. Of the four claims that were settled, three were settled for less than the deductible amount.

The Insurers did not breach any contractual or fiduciary duties, and the Insureds failed to show the existence of any genuine issues of material fact that should have precluded summary judgment.

Whether the Trial Court’s Grant of Summary Judgment on Lloyd’s Counterclaim Was Proper.

The Insureds claim that summary judgment in favor of Lloyd’s on Lloyd’s counterclaim was not proper because the Insureds were discharged from liability by Lloyd’s breach of contract, and/or the counterclaim was barred by Lloyd’s fraud, bad faith, and gross negligence.  The Insureds’ claims in this regard are wholly without merit. Therefore, no conduct by the Insurers served to discharge the Insureds from any responsibility. The Insureds are bound by the contract, and they must pay the amount of the deductible owed for each claim according to the terms of the policy. The trial judge did not err in granting summary judgment in favor of Lloyd’s on its counterclaim, and the Insureds owe Lloyd’s $701,153.54 for the amount Lloyd’s expended in the defense and settlement of the claims that fell within the deductible.

ZALMA OPINION

Mississippi, intelligently, requires an insured to read and understand an insurance policy when the language of the policy is open, obvious, clear and unambiguous. In This case the insured signed the deductible endorsement and agreed to it when they renewed the policy.

The Mississippi Supreme Court refused to be conned by the plaintiff insureds by allowing their blatant claim they did not know about the deductible was specious and unenforceable. Therefore, before filing suit against an insurer it is prudent to actually read the policy and determine if the arguments made can be supported by the facts and the law.

The Supreme Court should have punished the plaintiffs for bringing this action claiming something they knew or should have know were not true.

© 2013 – Barry Zalma

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

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

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

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

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“Zalma on Diminution of Value Damages — 2013″

“Zalma on Diminution of Value Damages — 2013″

This is the 2013 edition of Zalma On Diminution In Value Damages. It has been totally rewritten with more 910 pages of material. It is the most extensive and detailed coverage of the issue and how to apply diminution in value damages to losses to property. The E-book Zalma on Diminution In Value Damages – 2013 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). Available at http://www.zalma.com/diminution.htm

The Complete Authority on Diminution of Value Damages in the United States Zalma on Diminution of Value Damages — 2013 This is the 2013 edition of Zalma On Diminution In Value Damages. It has been totally rewritten with more 910 pages of material. It is the most extensive and detailed coverage of the issue and how to apply diminution in value damages to losses to property. The E-book Zalma on Diminution In Value Damages – 2013 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).

Because confusion has reigned across the United States concerning the proper measure of damages for property damage to property has been repaired. It will assist you in answer the questions concerning the proper measure of damage in each of the fifty United States and federal United States jurisdictions. It will allow you to find the answer in the appropriate jurisdiction if the proper measure of damage:

  • Is it cost of repair?
  • Is it the difference between fair market value before and fair market value after it is damaged?
  • Is it the cost of repair plus stigma damages?
  • Is it the cost of repair plus the difference between fair market value before and fair market value after it is damaged?
  • Is it something in the middle?

The subject of diminution of value damages caused serious concern to the insurance industry because insurers believed their policies were clear and were only required to pay the cost of repair. It also caused concern to appraisers, adjusters, lawyers and every person who incurred property damage. The methodology used to establish true indemnity is different in each decision. The application of which measure of damages is to be used is different from state to state and from U.S. District Court of Appeal to District Court of Appeal.

Because of the differences in the various jurisdiction and apparent confusion concerning diminution of value damages this E-Book was created to more thoroughly review how each jurisdiction in the United States deals with the issue. The E-book covers each of the fifty states of the United States, the District of Columbia, Guam, Puerto Rico, the 12 Federal Circuit Courts of Appeal and the U.S. Supreme Court.

Zalma on Diminution of Value Damages – 2013 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and tries to deal with the issue of establishing the amount of loss to property in each jurisdiction.

Since this is an update of the 2010 E-book, Zalma on Diminution in Value Damages some of the original information remains in the 2013 version which is, regardless, a new book.

The E-book covers in detail how each of the jurisdictions deal with the question of how much an insurer must pay for claims to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, or their insurers, to determine how to calculate what they must pay to those whose property is damaged by their actions.

Zalma on Diminution of Value Damages – 2013 provides full text of many of the decisions of the various courts, statutes enacted to deal with the issue, and deals with the issue of establishing the amount of loss to property in each jurisdiction that has written on the issue.

Since this is an update of the 2010 and 2012 E-books, Zalma on Diminution in Value Damages some of the original information remains in the 2013 version. It is, however, a new book.

The E-book covers in detail how each of the jurisdictions who have been asked to do so determine recovery of insurance proceeds for damage to property the risk of loss of which it insured. It also will explain how courts evaluate damages caused by tortfeasors, whether insured or not, to determine how to calculate what they must pay to those whose property is damaged by their actions.

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Reformation Not Allowed

Need Does Not Change Policy Wording

Serious injuries often result in litigation when insufficient insurance exists to compensate the injured. When Hatem Alshwaiyat was injured and his wife died in an automobile accident he sought coverage for underinsured motorist coverage with limits of $500,000 regardless of the limits stated in the policy.  Alshwaiyat sought a determination that a policy of automobile insurance issued to Alshwaiyat’s employer by American Service Insurance Company (ASI), provided $500,000 in underinsured motorist coverage for an automobile accident involving both plaintiff and his deceased wife. ASI has appealed from an order entering summary judgment in favor of plaintiff. In Hatem Alshwaiyat v. American Service Insurance Company, An Illinois Corporation, 2013 IL App 123222 (Ill.App. Dist.1 02/19/2013) the Illinois Court of Appeal resolved the dispute.

BACKGROUND

On July 11, 2011, Alshwaiyat filed a complaint for declaratory judgment, naming both ASI and Alshwaiyat’s employer, Mojo Enterprises (Mojo), as defendants. In that complaint, Alshwaiyat alleged that on June 17, 2008, he was employed by Mojo as a taxi driver when the automobile he was driving was struck by a vehicle operated by Mr. Robert Pas. As a result of this accident, Alshwaiyat suffered significant physical injuries and his wife, a passenger in the taxi, suffered injuries that resulted in her death. Claims against Mr. Pas for Alshwaiyat’s injuries and his wife’s wrongful death were ultimately settled for $100,000 each, the liability limits of the insurance policy held by Mr. Pas.

Alshwaiyat’s complaint further alleged that both Alshwaiyat and Mojo were insured under a policy of automobile insurance issued by ASI to Mojo, effective January 1, 2008, through January 1, 2009. That insurance policy was alleged to include $500,000 in liability coverage for bodily injury and property damage. It was further alleged that, due to the fact that uninsured motorist (UM) and underinsured motorist (UIM) coverage in an amount equal to that amount was never rejected by Mojo, “the policy must be construed to provide for $500,000.00 [in] underinsured motorist coverage.”

ASI filed an answer and affirmative defenses to Alshwaiyat’s complaint. Among ASI’s defenses was an assertion that in Mojo’s initial application for insurance, Mojo “specifically requested limits of $20,000/$40,000 for uninsured/underinsured motorist coverage, and rejected higher limits for that coverage.”

Alshwaiyat and ASI did not dispute the underlying facts. As such, they agreed that ASI issued an original policy of automobile insurance to Mojo. This policy originally provided a “combined single limit” (CSL) of $300,000 in bodily injury and property damage liability coverage. In the course of applying for this policy, Mojo’s president was informed of Mojo’s right to UM or UIM coverage in an amount equal to the bodily injury and property damage coverages. Mojo’s president signed a written rejection of such coverage, and also acknowledged in writing that Mojo could “at any future date, by written request, increase this coverage.” Therefore, the original policy only provided UM coverage in the amount of $20,000 per person and $40,000 per accident. It did not specifically provide for any coverage for UIM coverage.

That original policy was subsequently modified by a number of endorsements, including endorsements adding additional insured drivers and adding and removing specific insured vehicles.  There was no request for increased UM or UIM coverage on this form. Pursuant to this request, ASI prepared an endorsement to the original policy – issued on October 3, 2007, but effective October 1, 2007- in which the bodily injury and property damage liability limits were both increased to $500,000. The amount of UM coverage was not altered.

Alshwaiyat argued that both the endorsement and the subsequent policy were “new policies.” As such, Alshwaiyat contended that the Illinois statutes did indeed require Mojo to again reject higher UM and UIM coverage, both when the liability coverage limits were increased via endorsement and when the subsequent policy was issued with liability coverage limits that were higher than the original amounts. Because it was undisputed that no such rejection was made in connection with either the endorsement or the subsequent policy, Alshwaiyat further asserted that the statute required that the policy be reformed to provide UM and UIM coverage in an amount equal to the $500,000 bodily injury liability limit.

The trial court entered both a written order and a written decision denying ASI’s motion for summary judgment and granting summary judgment in favor of Alshwaiyat on his cross-motion. The trial court found that, because ASI had failed to comply with the provisions of the statute by obtaining a rejection of higher UM and UIM limits at the time of the endorsement increasing the amount of liability coverage in the original policy, the “RENEWAL” policy it issued to Mojo should be “reformed to set uninsured/underinsured motorist coverage limits at $500,000 to match the bodily injury liability limit.

ANALYSIS

As our supreme court has generally summarized, the statute requires that “[u]ninsured-motorist coverage must be provided in an amount equal to the liability coverage, unless the insured specifically rejects such additional coverage. [Citation.] If the uninsured-motorist coverage limit exceeds the minimum liability limit required by the Financial Responsibility Law, the policy must also include underinsured-motorist coverage in an amount equal to the uninsured-motorist coverage. [Citation.]”  Phoenix Insurance Co. v. Rosen, 242 Ill. 2d 48, 57 (2011).

The statutory exception to the requirement to offer matching UM and UIM coverage – in those cases where an insured has previously rejected higher UM or UIM limits – originally applied only to “renewal or supplementary” policies. That statutory exception was expanded to include “any renewal, reinstatement, reissuance, substitute, amended, replacement or supplementary” policies in a 1989 revision to the statute. When, as noted above, this provision was subsequently changed from a requirement to offer matching UM and UIM coverage to a requirement to provide such coverage, that expanded statutory exception was retained.

The Court of Appeal concluded that the statute did not require ASI to obtain another rejection of higher UM or UIM coverage limits in connection with either the endorsement increasing Mojo’s liability limits or when the “RENEWAL” policy was issued. Thus, the Court of Appeal concluded that failure to obtain such a rejection did not require reformation of the renewal policy to include $500,000 in UIM coverage.

The endorsement at issue here merely modified a term of the original policy – a policy that had already been delivered by ASI to Mojo – and did so without changing any other policy terms, the policy number, or the original policy’s duration. The policy in effect at that time was the subsequent “RENEWAL” policy. Clearly, this policy was one that “renewed” the original policy, or at the very least was one that had been “delivered or issued for delivery” by ASI.

It is undisputed that Mojo rejected UM or UIM coverage in excess of the statutory minimums when applying for the original policy, and did not make a written request for any higher UM or UIM coverage in connection with the “RENEWAL” policy. Moreover, it is apparent from the record that both the original policy and the “RENEWAL” policy were issued to Mojo (the named insured) by ASI (the insurer). ASI was not required to provide any greater UM or UIM coverage in the second policy so long as that policy was a renewal, reinstatement, reissuance, substitute, amended, replacement or supplementary policy.

The Court of Appeal’s interpretation of that language best accomplishes the goal of determining and effectuating the legislature’s intent, as it gives the current language of the statute’s plain and ordinary meaning. The statutory language clearly provides an exception for any renewal, reinstatement, reissuance, substitute, amended, replacement or supplementary policy. The court concluded: “If the court was to graft an additional requirement that any renewal, substitute, amended, replacement or supplementary policy not make any substantial or material changes onto the current language of the exception contained in the statute. To do so the court would improperly depart from the statute’s plain language by reading into it conditions, exceptions, or limitations that contravene legislative intent.”

ASI was not required to provide any greater UM or UIM coverage than the minimum amounts contained in the original policy, either in connection with the endorsement to the original policy or the subsequent renewal policy that was in effect at the time of the accident.

ZALMA OPINION

The trial court erred and provided monies to the injured widower without recognizing that the policy and statute made it clear that Mojo had rejected high UM/UIM limits and did so in accordance with the meaning of the statute.

It would be nice if Mr. Alshwaiyat was able to obtain an additional $500,000 to indemnify him for the loss of his wife and his injuries. However, to do so, he was required to convince the court to change the policy that his employer, Mojo, decided to buy. The Court of Appeal ruled upon the policy and the statute as written and failed to be moved by the serious injuries.

© 2013 – Barry Zalma

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

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

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

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

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No Fraud

No Right to Return of Premium When No Claim Paid

Juan M. Espinosa sued Allstate for fraud and lost. He appealed from the trial court’s entry of a final summary judgment in favor of Allstate, Allstate Insurance Co., Allstate County Mutual Insurance Co., and Allstate Property and Casualty Insurance Co. In Juan M. Espinosa, Appellant v. Allstate Insurance, No. NUMBER 13-12-00509-CV (Tex.App. Dist.13 02/14/2013) the Texas Court of Appeal resolved the dispute.

BACKGROUND

Espinosa purchased two automobile insurance policies from Allstate. Subsequently, Espinosa filed suit against Allstate for fraud, alleging that Allstate had fraudulently concealed information about their internal policies and procedures for handling claims, which according to Espinosa, was material to his decision to purchase the policies.

After suit was filed Allstate filed a motion for summary judgment. Among other things, Allstate argued that they were entitled to judgment as a matter of law because there is no evidence that Espinosa suffered an injury as a result of the conduct alleged. Specifically, Allstate argued that Espinosa had no evidence that

  1. the form and contents of his policies were not promulgated or approved for use by the Texas State Board of Insurance;
  2. the policies did not provide the coverages Espinosa requested;
  3. the premiums paid by Espinosa were other than those required by the filed-rates;
  4. the value of the policies for the policy periods when no claim was made was less than the premiums Espinosa paid for those policy periods; and
  5. Espinosa sustained any legally cognizable injury by virtue of how a claim would or might have been handled under the policies if a claim had been made.

Espinosa produced evidence that he argued established that:

  • in or about July, 1995, Allstate adopted new practices, procedures and forms for handling policyholder claims;
  • Allstate did not disclose these new practices, procedures and forms to Espinosa; and
  • if Allstate had disclosed these practices, procedures and forms to Espinosa, Espinosa would not have purchased or renewed either policy.

The trial court granted Allstate’ motion for summary judgment. In relevant part, the trial court’s corrected final summary judgment recites the following: “[Espinosa] is the named insured on two, and only two, automobile policies …  and Casualty Insurance Company…”

Three claims were made against one policy. Benefits were paid to or on behalf of Espinosa on each of these claims, and each of these claims has been fully resolved. There were no claims made against the other policy.

There is no evidence that the form and contents of either these policies were not promulgated or approved for use in Texas by the State Board of Insurance.

There is no evidence that either of these policies did not provide the coverage requested by Espinosa. There is no evidence that the premiums Allstate charged and Espinosa paid for either of these policies were not the amounts required under the insurer’s rate for the coverages provided by the policies filed under the State’s flexible rating program for personal automobile insurance.

Espinosa seeks to recover restitution of the premiums he paid for policy years in which he had no claims for benefits under these automobile insurance policies, together with interest and punitive damages, for fraud by which he was induced to buy all of the insurance in question. Espinosa claims that with respect to such “no benefit years,” the Texas public policy against permitting perpetrators of fraud to keep the fruits of their fraud requires that Espinosa be allowed to recover restitution of the premiums he paid for such “no benefit years.” Allstate claimed that Espinosa had the benefit of coverages sold to Espinosa for such “no benefit years,” even if Espinosa made no claims for benefits in those years, so that restitution is not a remedy available to Espinosa, even if he were induced by fraud to buy the insurance in question.

The trial court concluded under the facts the Motion should be granted for the sole reason that Espinosa had the benefit of coverages sold to him for such “no benefit years,” even though he made no claims for benefits in those years.

ANALYSIS

In deciding whether there is a genuine issue of material fact, evidence favorable to the non-movant is taken as true, and all reasonable inferences are made, and all doubts are resolved, in favor of the non-movant.
The gist of fraud is successfully using cunning, deception or artifice to cheat another to the other’s injury. The elements of fraud are:

  1. that a material representation was made;
  2. the representation was false;
  3. when the representation was made, the speaker knew it was false or made it recklessly without any knowledge of the truth and as a positive assertion;
  4. the speaker made the representation with the intent that the other party should act upon it;
  5. the party acted in reliance on the representation; and
  6. the party thereby suffered injury.

In this case, Espinosa alleged that because of Allstate’ fraud, he purchased two automobile insurance policies that he otherwise would not have purchased. In response Espinosa produced an affidavit in which he states that, if the information at issue had been disclosed to him, he would not have purchased or renewed either of the two automobile insurance policies he purchased from Allstate. According to Espinosa, this is a sufficient injury to support a cause of action for fraud.

The fraud alleged in this case is fraud in the inducement. In a claim of fraudulent inducement, the elements of fraud must be established as they relate to an agreement between the parties.  Fraudulent inducement is a particular species of fraud that arises only in the context of a contract and requires the existence of a contract as part of its proof.

To establish the element of an injury, Espinosa was required to produce evidence of either (1) an economic loss related to the policies or (2) a distinct tortious injury with actual damages. Espinosa produced no evidence of an economic loss related to the policies. Nor did Espinosa produce evidence of a distinct tortuous injury with actual damages.

In fact, Espinosa concedes that Allstate provided him with the benefit of coverage under the policies. Espinosa concedes that absent Allstate’s fraud, it could rightly be said that Allstate earned the premiums they collected from Espinosa for the ‘no benefit years.’

The Court of Appeal concluded that the trial court was correct in ruling that Espinosa received the benefit of coverage, that there is no evidence of an injury for purposes of maintaining a cause of action for fraud, and that Allstate were therefore entitled to judgment as a matter of law.

ZALMA OPINION

The lawsuit and appeal should have been the subject of a motion for sanctions for being frivolous. Although most people believe they only need insurance when they have a loss and paying a premium for the years when there is no reason to file a claim is a waste, it is not fraud, it is insurance.

Insurance is a risk spreading device. It only works when thousands of people get together and pay premiums so that a few who need to make a claim can recover the indemnity promised by the policy. The premium is earned when the insurer agrees to take on the risk not when it is called upon to pay.

People who are insured, lawyers, judges and the public at large must understand insurance as a contract where one party agrees to indemnify another against a contingent or unknown risk for the payment of a premium. No one would buy insurance if that person could wait until the loss occurs and then pay a small amount of premium to cover for a major loss. Insurance cannot work unless the risk is spread among many.

© 2013 – Barry Zalma

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

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

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

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

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Deported for Insurance Fraud

Commit Insurance Fraud – Leave the Country – Now!

Immigration officials initiated removal proceedings against petitioner Roselva Chaidez in 2009 upon learning that she had pleaded guilty to mail fraud in 2004. To avoid removal, she sought to overturn that conviction by filing a petition for a writ of coram nobis (the designation of a remedy for setting aside an erroneous judgment in a criminal action that resulted from an error of fact in the proceeding), contending that her former attorney’s failure to advise her of the guilty plea’s immigration consequences constituted ineffective assistance of counsel under the Sixth Amendment. While her petition was pending, this Court held in Padilla v. Kentucky, 559 U. S. ___, that the Sixth Amendment requires defense attorneys to inform non-citizen clients of the deportation risks of guilty pleas. The District Court vacated Chaidez’s conviction. The Seventh Circuit reversed, holding that Padilla had declared a new rule and should not apply in a challenge to a final conviction. In Chaidez v. United States, No. 11-820 (U.S. 02/20/2013) the U.S. Supreme Court, by Kagan, J. resolved the issue of whether, before Padilla, a lawyer was required to advise the client of the immigration consequences of a guilty plea.

A person whose conviction is already final may not benefit from a new rule of criminal procedure on collateral review. A case announces a new rule if the result was not dictated by precedent existing at the time the defendant’s conviction became final.

KAGAN, J., delivered the opinion of the Court, in which ROBERTS, C. J., and SCALIA, KENNEDY, BREYER, and ALITO, JJ., joined. THOMAS, J., filed an opinion concurring in the judgment. SOTOMAYOR, J., filed a dissenting opinion, in which GINSBURG, J., joined.

History

In Padilla v. Kentucky, 559 U. S. ___ (2010), the Supreme Court held that the Sixth Amendment requires an attorney for a criminal defendant to provide advice about the risk of deportation arising from a guilty plea. The U.S. Supreme Court considered whether that ruling applies retroactively, so that a person whose conviction became final before it decided Padilla can benefit from it.

Petitioner Roselva Chaidez hails from Mexico, but became a lawful permanent resident of the United States in 1977. About 20 years later, she helped to defraud an automobile insurance company out of $26,000. After federal agents uncovered the scheme, Chaidez pleaded guilty to two counts of mail fraud. The District Court sentenced her to four years of probation and ordered her to pay restitution. Chaidez’s conviction became final in 2004.

Aggravated Felony

Under federal immigration law, the offenses to which Chaidez pleaded guilty are “aggravated felonies,” subjecting her to mandatory removal from this country. According to Chaidez, her attorney never advised her of that fact, and at the time of her plea she remained ignorant of it.

Immigration officials initiated removal proceedings against Chaidez in 2009, after an application she made for citizenship alerted them to her prior conviction. To avoid removal, Chaidez sought to overturn that conviction by filing a petition for a writ of coram nobis in Federal District Court. She argued that her former attorney’s failure to advise her of the immigration consequences of pleading guilty constituted ineffective assistance of counsel under the Sixth Amendment.

While Chaidez’s petition was pending, the Supreme Court decided Padilla. The ruling vindicated Chaidez’s view of the Sixth Amendment. It held that criminal defense attorneys must inform non-citizen clients of the risks of deportation arising from guilty pleas. The trial court determined that Padilla “did not announce a new rule. It then found that Chaidez’s counsel had performed deficiently under Padilla and that Chaidez suffered prejudice as a result. Accordingly, the court vacated Chaidez’s conviction.

The United States Court of Appeals for the Seventh Circuit reversed, holding that Padilla had declared a new rule and so should not apply in a challenge to a final conviction. The Supreme Court granted certiorari to resolve a split among federal and state courts on whether Padilla applies retroactively.

Chaidez filed her coram nobis petition five years after her guilty plea became final. Her challenge therefore fails if Padilla declared a new rule. A case announces a new rule when it breaks new ground or imposes a new obligation on the government.  To put it differently a case announces a new rule if the result was not dictated by precedent existing at the time the defendant’s conviction became final.

Ten federal appellate courts that considered the question decided, in the words of one, that counsel’s failure to inform a defendant of the collateral consequences of a guilty plea is never a violation of the Sixth Amendment. That constitutional guarantee assures an accused of effective assistance of counsel in criminal prosecutions; accordingly, advice about matters like deportation, which are not a part of or enmeshed in the criminal proceeding, does not fall within the Amendment’s scope.

When the Supreme Court decided Padilla, it answered a question about the Sixth Amendment’s reach that was left open, in a way that altered the law of most jurisdictions. The Supreme Court’s reasoning reflected that it was doing as much.

Before Padilla, the Supreme Court had declined to decide whether the Sixth Amendment had any relevance to a lawyer’s advice about matters not part of a criminal proceeding. Perhaps some advice of that kind would have to meet a reasonableness standard-but then again, perhaps not.  It was Padilla that first rejected that categorical approach when a criminal lawyer gives (or fails to give) advice about immigration consequences.

Chaidez offers a different account of Padilla, in which we did no more than apply earlier precedent to a new set of facts. That argument failed and Justice Kagan wrote that the Supreme Court announced a new rule in Padilla. Defendants whose convictions became final prior to Padilla therefore cannot benefit from its holding.

JUSTICE THOMAS, concured in the judgment. He stated that he continues to believe that Padilla was wrongly decided and that the Sixth Amendment does not extend-either prospectively or retrospectively-to advice concerning the collateral consequences arising from a guilty plea. He concurred, therefore, only in the judgment.

JUSTICE SOTOMAYOR, with whom JUSTICE GINSBURG joined, dissented.

ZALMA OPINION

The Supreme Court’s opinion is important to immigrant felons who were convicted of aggravated felonies like mail or insurance fraud before Padilla must be deported immediately even if their lawyer failed to advise the defendant of the immigration hazard of pleading guilty. After Padilla all criminal defense lawyers must advise their clients of the immigration problems a guilty plea will cause. I expect that when an immigrant – legal or undocumented – pleads guilty to an aggravated felony like insurance fraud, the court will advise the defendant of the consequences of the plea.

The U.S. government should be advised of all convictions of non-citizens of an aggravated felony so that they can be immediately deported. Ms. Chaidez, by appealing her coram nobis petition to the U.S. Supreme Court spent a great deal of money and time of the U.S. government and has established beyond doubt that she must be deported and never return and proved that – for some – insurance fraud does not pay.

© 2013 – Barry Zalma

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

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

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

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

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Accord & Satisfaction

Acceptance of Policy Limits Concludes Claim

After a fire destroyed its warehouse, Go Wireless, LLC, sued its insurer, Maryland Casualty Company, for breach of contract and reformation. Go Wireless contended that Maryland had agreed to provide $2.5 million in business personal property coverage. Maryland subsequently asserted coverage was limited to $546,400. The circuit court granted summary judgment in favor of Maryland, concluding that Go Wireless’s acceptance of $546,400 from Maryland constituted an accord and satisfaction. The Wisconsin Court of Appeal resolved the dispute in Go Wireless, LLC v. Maryland Casualty Company, No. 2012AP321 (Wis.App. 02/19/2013).

Background

Go Wireless was co-owned by David Graves and Ned Bartels. From 2003 until November 2008, Go Wireless was an exclusive sales agent for U.S. Cellular. At its peak, Go Wireless had fifty-five stores in seven states.

Go Wireless purchased its business insurance through Northern Insurance Associates-Bartels & Brown, LLC, which served as its insurance agent for nine years. In addition, Northern routinely advised Go Wireless on insurance matters.

Through Northern, Go Wireless purchased an insurance policy from Maryland that provided business personal property coverage. As of July 2008, Go Wireless had fifty store locations, and the Maryland policy provided about $50,000 in business personal property coverage for each location. The policy also provided “blanket” business personal property coverage in the amount of $2,577,601. That figure represented the total amount of business personal property coverage for all of Go Wireless’s locations. The blanket coverage allowed Go Wireless to aggregate the policy limits for each of the insured locations in order to cover a single loss at any one location.

In fall of 2008, U.S. Cellular decided not to renew its contract with Go Wireless. As a result, Go Wireless sold the leases on all of its retail locations to U.S. Cellular and began winding up its business. On November 17, 2008, Kristen Vosters, Go Wireless’s office manager, contacted Maryland through the “Zurich Small Business Customer Service Center.” Vosters informed Maryland that Go Wireless had sold its operations to U.S. Cellular, and, therefore, needed to remove all but two locations from its policy. The two remaining locations covered by the policy were: (1) Go Wireless’s corporate headquarters, located at 740 Ford Street in Kimberly; and (2) a warehouse, located at 575 Timmers Lane in Appleton.

On March 16, 2009, Graves informed Northern that Go Wireless’s operations at the Ford Street location had ceased, and he directed Northern to delete coverage for the Ford Street location. This left the Timmers Lane warehouse as the only location insured under the Maryland policy. Graves instructed Northern to increase the business personal property limit for the Timmers Lane warehouse from $50,000 to $546,400, which had been the business personal property limit for Go Wireless’s previous primary location. Northern did not inform him that removing the Ford Street location would affect the blanket coverage. About one week later, the Timmers Lane warehouse was destroyed in a fire.

Go Wireless subsequently submitted a claim to Maryland, alleging the fire had destroyed $1.2 million of business personal property. At the time, Bartels and Graves believed the Maryland policy provided $2.5 million of blanket business personal property coverage.

Maryland subsequently tendered two checks to Go Wireless. After paying $546,000 Maryland pointed out that there was still outstanding claim available for the replacement of the building.

Go Wireless deposited both of the checks it received from Maryland.

Go Wireless then sued for breach of contract and negligence claims against Northern and breach of contract and reformation claims against Maryland. Northern filed a cross-claim against Maryland, seeking contribution or indemnification. Specifically, Northern argued that Maryland breached a duty to advise Go Wireless that removing locations from its policy would eliminate the blanket coverage and therefore result in inadequate business personal property coverage.

The trial court concluded that Go Wireless’s claims against Maryland were barred because Go Wireless’s acceptance of Maryland’s payments constituted an accord and satisfaction. Regarding Northern’s cross-claim, the court concluded all the coverage issues were dealt with from Northern Insurance agents and not directly with Maryland Casualty, Consequently, the court concluded Northern was not entitled to contribution or indemnification from Maryland, and it dismissed the cross-claim.

Accord & Satisfaction

The circuit court concluded Go Wireless’s claims against Maryland were barred by the doctrine of accord and satisfaction. An accord and satisfaction is an agreement between parties to discharge an existing disputed claim. Under the doctrine of accord and satisfaction, if a creditor cashes a check from a debtor that has been offered as full payment for a disputed claim, the creditor is deemed to have accepted the debtor’s offer, notwithstanding any reservations by the creditor.

An accord and satisfaction is a contract. Where the facts are undisputed, the existence of a contract is a question of law that a court of appeal reviews independently.  Like other contracts, an accord and satisfaction requires an offer, an acceptance, and consideration.

First, for a valid accord and satisfaction, the debtor must make an offer that contains expressions sufficient to make the creditor understand that performance is offered in full satisfaction of the creditor’s claim. It is immaterial that checks making payment did not contain the words “full payment” or other “magic language.”  Instead, if the letters conveying the checks reasonably notified the farmers that the accompanying checks were offered as full payment under the contract there is sufficient proof of an accord and satisfaction.

The letters Maryland sent Go Wireless explained that, when Go Wireless removed all but one insured location from its policy it eliminated the policy’s blanket business personal property coverage.  On November 2, 2009, Maryland sent Go Wireless a second letter that enclosed a check comprising the remainder of the $546,400 policy limits. The November 2 letter expressly stated that, together with a previous payment of $350,000, the second payment “brings the claim settlement amount to the [business personal property] policy limit of $546,400.00, thus exhausting the [business personal property] coverage for this loss.”

It was immaterial that Maryland’s first letter included a boilerplate reservation of rights. When read together and in their entirety, the two letters clearly informed Go Wireless:

  1. that Maryland believed Go Wireless’s business personal property coverage was limited to $546,400; and
  2. that, in Maryland’s view, the payment enclosed with the second letter extinguished Maryland’s obligation to provide business personal property coverage.

Notice

The letters gave Go Wireless the reasonable notice required for an accord and satisfaction.

Acceptance

An accord and satisfaction also requires an acceptance. However, where accord and satisfaction is concerned, acceptance does not require mental assent or a meeting of the minds. Instead, the question is whether the creditor manifested an intent to accept the debtor’s offer. The requisite intent can be manifested either by actions or words, and actions can constitute acceptance even when accompanying words express a contrary intent. Go Wireless deposited Maryland’s checks, and it gave no indication that the checks were not accepted as payment in full. Thus, Go Wireless manifested its intent to accept Maryland’s offer. Because mental assent is not required for an accord and satisfaction, whether Go Wireless actually intended to accept Maryland’s offer is irrelevant.

Consideration

The amount of business personal property coverage is something of monetary value, and it was clearly in controversy following the fire. The resolution of the parties’ dispute over the amount of coverage therefore provided sufficient consideration for an accord and satisfaction.

Consequently, the undisputed facts establish that Go Wireless’s acceptance of Maryland’s checks constituted an accord and satisfaction.

Because Maryland did not waive its accord and satisfaction defense, and because the undisputed facts established an accord and satisfaction, the appellate court concluded that the trial court properly granted Maryland summary judgment on Go Wireless’s claims.

Northern’s Cross-Claim

The circuit court also granted Maryland summary judgment on Northern’s cross-claim.

Unlike Northern, which had developed an intimate knowledge of Go Wireless’s business, Maryland had no way of knowing that Go Wireless still wanted or needed $2.5 million in blanket business personal property coverage after it removed the vast majority of its locations from the policy. In practice, the responsibility for advising Go Wireless remained with Northern, regardless of the language of the producer agreement. Consequently, Northern’s cross-claim for contribution or indemnification fails.

ZALMA OPINION

Insurers and insureds faced with a dispute over the available policy limits should take warning from this case and its use of the ancient remedy of accord and satisfaction. The insurer must make clear that the payments presented are for the full amount of the obligation owed by the policy so that if there is a later dispute it can claim accord and satisfaction.

The insured, on the other hand, should never accept payment if it disputes the amount of loss without first obtaining from the insurer its agreement that acceptance and cashing of the check(s) by the insured is not a waiver of its right to claim higher limits and that its cashing of the checks do not constitute an accord and satisfaction. Most insurers would agree to avoid charges of bad faith.

© 2013 – Barry Zalma

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

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

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

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

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New ISO Forms

ISO is presenting new wordings to the various states.

Insurance Services Office’s (ISO’s) four major filings in commercial property, business auto, businessowners coverage, and commercial general liability (CGL) make 2013 a big year for insurance professionals. The author expects to present two future articles that focus on the changes that begin taking effect this year in the commercial general liability forms and endorsement

You can get details on the new forms at http://www.mynewmarkets.com/articles/181365/isos-commercial-general-liability-filing-get-ready

Part II is at http://www.mynewmarkets.com/articles/181397/isos-commercial-general-liability-filing-part-two-endorsements and part III is at http://www.mynewmarkets.com/articles/181416/isos-commercial-general-liability-filing-part-three-new-endorsements

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Buyers Remorse

You Only Get What You Pay For!

Most young people believe they are indestructible and immortal. They never think they will be injured in an accident.  Insurance, especially insurance for motorcycle riders can be expensive. Almost every state, like South Carolina, requires that automobile and motorcycle liability insurers must offer uninsured and underinsured motorist insurance coverage. Many people, in an attempt to save money, refuse uninsured and underinsured motorist coverage. After they are involved in an accident they regret their decision and hire lawyers to get them the coverage they did not order and did for which they did not pay the insurer.

Greg and Stacy Cohen sued Progressive Norther Insurance Company (“Progressive”) requesting reformation of a motorcycle insurance policy issued by Progressive to include underinsured motorists (UIM) coverage. The trial court refused to reform the policy, finding Progressive made a meaningful offer of UIM coverage. In Greg Cohen and Stacy Cohen v. Progressive Northern Insurance Company and Autoowners Insurance, No. 5083 (S.C.App. 02/13/2013) the South Carolina Court of Appeal was asked to resolve, and did resolve, the dispute.

Facts

In 2005, Greg Cohen called Citizens Insurance Agency to purchase a policy for his motorcycle. He remembers speaking with a female employee about the policy but does not recall her name. Meredith Thomason, a Citizens Insurance agent, does not specifically recall speaking with Cohen but testified she wrote the quote sheet generated as a result of that call. She also signed the application form for Cohen’s policy.

Thomason that a transaction begins with a phone call, and she fills out a quote sheet while talking with the client. She then creates an application form using input from the client, and prints it only after she and the client have discussed and agreed upon what types and limits of coverage he wants. When the client comes to Citizens Insurance’s office to complete the application, Thomason gives him an opportunity to read it. Going through each page of the application, she explains UIM coverage, tells the client he is not required by law to have it, and recommends the client buy UIM coverage with limits equal to the other types of coverage he is purchasing. She also reviews which coverage the client is selecting and which he is rejecting in the application form. The client signs the application in several places, including an acknowledgment stating he has read the information that Thomason presented to him regarding UIM coverage. Thomason then signs on a line indicating that the client has completed and signed the application. After that, she gives the client a copy. Thomason testified she never deviates from this procedure.

Cohen’s recollection of applying for his policy differs from Thomason’s procedure. He testified that when he called Citizens Insurance, he told the agent, “I want the same coverage that I have on my Expedition, my other vehicle. “He does not recall talking on the phone about UIM coverage. The next day, he went to Citizens Insurance’s office and spent less than five minutes signing paperwork. The employee with whom he met did not explain what was in the paperwork, and Cohen did not review the documents before signing them. They did not discuss what coverage limits he wanted or what would happen if he did not buy UIM coverage and was later injured. He testified he did not tell the employee that he did not want UIM coverage.

The application Cohen and Thomason signed includes an explanation of what UIM coverage is and how it works. Additionally, the application explains that UIM coverage is optional and that it can be purchased up to the limits of the liability coverage Cohen was purchasing. Another page, entitled “Offer of underinsured motorist coverage,” has a table listing four levels of UIM coverage limits and the increased premium Cohen would have to pay for each level. The highest of the four levels is equal to the limits of the liability and uninsured motorist coverage Cohen requested in the application form. Below that table, the application asks, “Do you wish to purchase underinsured motorist coverage?” and provides blanks next to the words “Yes” and “No.”A computer-generated “X” appears in the blank next to “No.”Thomason selected that “X” when she generated the form on her computer. The next line of the application states, “If your answer is ‘no’ then you must sign here,” and then provides a signature line. Cohen signed on that line.  The word “REJECTED” is typed below and based on the application form, Progressive issued Cohen a policy that does not provide UIM coverage.

In 2007, Cohen was injured while riding his motorcycle. The Cohens filed this declaratory judgment action against Progressive and Auto-Owners Insurance Company. They asked that Progressive’s policy be reformed to provide UIM coverage in the amount of the limits of the policy’s liability coverage.

The trial court found Progressive made a meaningful offer of UIM coverage and Cohen rejected the offer.

Meaningful Offer of UIM Coverage

Automobile insurers are required by statute to offer underinsured motorist coverage up to the limits of the insured’s liability coverage. The South Carolina Supreme court has interpreted this language to require that the insured be provided with adequate information to allow the insured to make an intelligent decision of whether to accept or reject the coverage.

In general, for an insurer to make a meaningful offer of UIM coverage, (1) the insurer’s notification process must be commercially reasonable, whether oral or in writing; (2) the insurer must specify the limits of optional coverage and not merely offer additional coverage in general terms; (3) the insurer must intelligibly advise the insured of the nature of the optional coverage; and (4) the insured must be told that optional coverages are available for an additional premium.

The trial court also based its factual findings on the contents of the form Progressive used to make the offer. The court specifically found “the offer form fully satisfied the five requirements of the statute.

The court of appeal agreed with the trial court that the form, which was prescribed by the South Carolina Department of Insurance and includes language nearly identical to that endorsed by the supreme court in earlier decisions, contained all of the information required by statute and case law. Finally, the trial court found that by signing the form, Cohen was deemed to understand its contents. Cohen signed the form in three places, including a page in which he acknowledged that he either read, or had someone read to him, the form’s explanation of UIM coverage and its offer of that coverage. It is important to note that failure to comply with the statute does not automatically require judicial reformation of a policy. Rather, even where an insurer is not entitled to the presumption that it made a meaningful offer, it may prove the sufficiency of its offer by showing that it complied.

The court of appeal held that an insurer’s noncompliance with the statute does not render the use of the statute’s form a non-complying offer. Rather, the phrase non-complying offer, refers to an offer that is not meaningful. Therefore, the insurer’s inability to get the conclusive presumption under the statute does not mean the insurer did not make a meaningful offer in compliance with the statute. Rather, it simply means the trial court must make the factual determination of whether the insurer made a meaningful offer. The trial court made that factual determination.

ZALMA OPINION

Hindsight is always 20/20. The Cohens, after the accident, knew that they needed UIM coverage. They tried to get the court to provide that coverage that they did not order and did not pay for, by claiming they asked for the coverage and should have received it. The trial court, finding from the signature on three different forms  refusing the coverage, and the testimony of the agent who took the application, that the Cohens received a meaningful offer of coverage and refused it.

If his injuries were serious enough it might have been worthwhile to try to get that coverage but the signature on three forms made it clear there was no ground for reformation of the insurance policy since there was no mutual mistake, misrepresentation or fraud to support reformation.

© 2013 – Barry Zalma

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

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

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

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

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Contract of Personal Indemnity

Consent Needed to Assign a Liability Insurance Policy

Insurance is, by definition, a contract of personal indemnity. The insurer decided whether the individual or corporation it is insuring was a risk it was willing to take. Every liability insurance policy I have read contains an anti-assignment clause requiring the written consent of the insurer before a policy can be assigned to another. The reason for such clauses is that the insurer has the right to determine who it will insure and does not give that right away to an insured. If there is to be an assignment the new insured must provide sufficient information to the insurer so that it can make a reasoned decision whether it wished to insure or not insure the new entity.

WASCO LLC sued Bituminous Casualty Corporation (Bituminous), an insurance company, claiming it breached its duties under two insurance policies when it did not defend WASCO after receiving a notice of potential liability from the United States Environmental Protection Agency (EPA) during an EPA investigation process. Bituminous claimed that WASCO cannot be an assignee of the policy without Bituminous’s written consent pursuant to the terms of the insurance policy. WASCO claims that no written consent is required. The trial court granted Bituminous’s motion for summary judgment dismissing the suit. The Illinois Court of Appeal resolved the dispute in Water Applications and Systems Corporation, N/K/A Wasco LLC v. Bituminous Casualty Corporation, 2013 IL App 120983 (Ill.App. Dist.1 02/15/2013).

BACKGROUND

WASCO filed a breach of contract action against Bituminous involving two general liability insurance policies where WASCO was not named as an insured. WASCO argues that it assumed the policies by purchasing the assets of Palm Oil Recovery, Inc., a palm oil recycling company, the named insured.

Policy A contains an anti-assignment clause, which states:

“9. Assignment: Assignment of interest under this policy shall not bind the company unless its consent is endorsed hereon ***.”

WASCO claims that, in 1971, Palm Oil Recovery, Inc., merged with some other companies to form Pori, Inc., which was then sold in 1981 to Pori Holdings, Inc., and thereafter renamed PORI International, Inc.

On November 30, 1971, Bituminous issued a second third-party liability insurance policy (No. GA686764; hereinafter Policy B), which covered Pori, Inc. as the named insured from November 9, 1971, through November 9, 1972. Policy B was issued with the same contract language as Policy A and included the same provisions. Under its declarations, Policy B states that it is a renewal of Policy A.

On February 28, 1997, PORI International, Inc. executed an asset purchase agreement (Purchase Agreement) to sell its assets to U.S. Filter Recovery Services (Midatlantic), Inc. (USFRSM), a subsidiary wholly owned by U.S. Filter Recovery Services, Inc. (USFRS). USFRS was a wholly owned subsidiary of United States Filter Corporation (USFC). At the time of the Purchase Agreement, WASCO was known as USFC. On August 2, 2004, USFC changed its name to Water Applications & Systems Corporation, which was later renamed WASCO LLC on December 22, 2006.

The Purchase Agreement set forth the terms of the sale of PORI International, Inc.’s assets to WASCO.  It also provided: “Insurance. Schedule 3.19 discloses all insurance policies on an ‘occurrence’ basis with respect to which Seller is the owner, insured or beneficiary.”

The Purchase Agreement additionally contained the following clause on consent rights:

“2.12 Certain Consents. Nothing in this agreement shall be construed as an attempt to assign any contract, agreement, Permit, franchise, or claim included in the Purchased Assets which is by its terms or in law nonassignable without the consent of the other party or parties thereto, unless such consent shall have been given, or as to which all the remedies for the enforcement thereof enjoyed by Seller would not, as a matter of law, pass to Buyer as an incident of the assignments provided for by this Agreement.”

The appellate record does not show that Bituminous consented to the alleged assignment of the subject policies. The appellate record does not contain the alleged assignment or any evidence that its premiums were prorated or paid by WASCO.

The Instant Action

WASCO brought suit in the circuit court of Cook County against Bituminous on May 1, 2009.

Bituminous filed a motion for summary judgment, claiming that WASCO did not provide any evidence that it had properly assumed the subject policies by assignment and therefore was not entitled to a defense of the EPA matter. Bituminous argued that assignment of the subject policies required Bituminous’s consent, which was not given.

ANALYSIS

WASCO filed this appeal seeking to reverse the trial court’s order granting summary judgment in favor of Bituminous. WASCO claims that the trial court erred because WASCO presented sufficient evidence to create a material issue of fact about whether it owns the subject policies and is entitled to a defense in an action by the EPA. WASCO also argues that it assumed the subject policies when it purchased the assets of PORI International, Inc., in 1997.

WASCO argued that it assumed the subject policies in the Purchase Agreement, which assigned to WASCO “substantially all of [PORI International, Inc.’s] assets and certain *** liabilities.” Bituminous claimed that while the sale included many insurance policies, the policies at issue were not identified among them. Bituminous argued that any insurance policies not named in the Purchase Agreement are retained liabilities that do not transfer in an asset sale.

In its entirety, section 5.5 does not assign the subject policies to WASCO. Instead, section 5.5 describes PORI International, Inc.’s future responsibilities regarding insurance policies that were not assigned to WASCO in the asset sale. Additionally, there is no evidence in the appellate record that the subject policies were assigned to WASCO at any point in time. The policies at issue were not named in the asset sale. The Purchase Agreement clearly states that all insurance policies that are assigned are named in schedule 3.19, which does not list the subject policies. It follows that all insurance policies that were not assigned are retained liabilities that remain with PORI International, Inc., pursuant to the Purchase Agreement.

The issues presented in the instant case involve the interpretation of the subject policies, not the Purchase Agreement. In addition, section 2.12 of the Purchase Agreement prohibits the assignment of contracts that are nonassignable by its terms or in law. By the terms of the insurance contract, the subject policies cannot be assigned without Bituminous’s consent.

It has been well established under Maryland law that an anti-assignment clause is valid and enforceable. The appellate record does not indicate Bituminous’s reasoning behind the inclusion of the anti-assignment clause in its policy. The language could have been included in the policies to prevent the insurance company from receiving claims from multiple parties or exposing itself to additional risks that it did not foresee when it issued its policies.

PORI International, Inc., was not changing the legal status of its business. Rather, it was selling its assets to WASCO, which is an entirely different corporation. As a result the court of appeal concluded that the Bituminous policies were not assigned to WASCO because Bituminous did not provide its written consent.

The anti-assignment clause prohibited the assignment of the policies without written consent and Bituminous never gave its written consent to an assignment of the insurance policies. Additionally, even if the policies were properly assigned to WASCO, a general liability insurance policy does not cover a regulatory action by the EPA. Therefore, Bituminous did not have a duty to defend WASCO because the policies at issue did not cover the EPA investigation process.

ZALMA OPINION

It is, and should be, impossible for an insured to assign its rights under an insurance policy, before a loss, to anyone without first obtaining the permission of its insurer. Insurance, as a contract of personal indemnity, is a contract where an insurer makes a determination that it is willing to insure the person or corporation seeking insurance. If the anti-assignment clause was made unenforceable as WASCO contented in this case insurers would be required to insure anyone forced upon them by its insured.

WASCO’s argument would allow a good risk like APPLE to assign its policy to Bernard Madoff, and force an insurer to insure a person it would never insure if given a choice. The clause is there to allow the insurer to select he who it will insure.

© 2013 – Barry Zalma

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

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

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

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

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Insurance Fraud Continues Unabated

Zalma’s Insurance Fraud Letter

Continuing with the fourth issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the February 15, 2013 issue on the state of Minnesota’s call for more insurance fraud investigations, prosecutions and convictions; a report on the conviction of an insurance fraud perpetrator who made claim to multiple insurance companies for the theft of the same items of jewelry; a “man bites dog” story about an insurer who was found by a jury to have defrauded an agent; and a “just for fun” transcript of trial testimony proving that a lawyer should never ask a question to which he or she does not know the answer.

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

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

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

Zalma on Insurance

•    Medical Provider Gets Nothing
•    Advertising Injury
•    FIVE YEAR LATE NOTICE
•    Read The Policy
•    Primary v. Excess
•    Aggravated Assault Not an Occurrence
•    One Occurrence – One Limit
•    Premium Audit or Prosecution
•    No Third Party Direct Action in Kentucky
•    Fraud Continues and Destroys Insurer

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

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

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

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

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

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Medical Provider Gets Nothing

No-Fault Release Ends Obligation of Insurer

The Michigan Court of Appeal was asked to decide whether an insured’s release bars a health care provider’s claim for reimbursement for medical services rendered to the insured after the release was executed. In Michigan Head & Spine Institute, P.C v. State Farm Mutual Automobile Insurance Company, No. 307253 (Mich.App. 02/12/2013) the Michigan Court of Appeals resolved the dispute by interpreting the release language and applying its clear and unambiguous language.

FACTUAL BACKGROUND

Pellumbesha Biba (“Biba”) was insured under a no-fault policy that State Farm Mutual Automobile Insurance Company (“defendant”) issued. Biba was injured in an accident. On July 30, 2009, in exchange for $35,000 and in settlement of ongoing litigation with defendant, Biba executed a release, which stated in pertinent part:

For the sole consideration of the amount of $35,000.00, Pellumbesha Biba … does hereby release and discharge [defendant] … from any and all claims and demands for no-fault insurance benefits, of any kind whatsoever, for any and all expenses incurred to date and/or which may be incurred at any time in the future by or on behalf of Pellumbesha Biba arising out of [the] accident … including but not necessarily limited to:

1. Other than explained in the paragraph below, any and all allowable expenses of any kind whatsoever for reasonably necessary products, services, and accommodations for [Biba’s] care, recovery, or rehabilitation, including, but not limited to, medical, psychiatric, psychological, counseling, dental, chiropractic, medication, mileage, caretaking, attendant care, skilled nursing care, assistant care and/or skilled care from the date of the above accident through the present and/or which may be incurred at any time in the future.

* * *

5. Any and all expenses incurred in obtaining ordinary and necessary services from the time of the above accident to the present and/or which may be incurred at any time in the future for services which may have been paid or payable at the maximum rate of $20 per day pursuant to the Michigan No-Fault Act.

Notwithstanding any other provision in this document, [Biba] is permitted to seek and make a claim for expenses for accident-related medical care provided by the University of Michigan Health System, if that care is provided prior to July 6, 2010. Any expenses incurred after July 6, 2010 by [Biba] and related to the above-described accident will not be considered and [Biba] is forever barred from making claims for such expenses…

On February 26, 2010, more than six months after signing the release, Biba began treating with plaintiff because of injuries that she sustained in the accident. Defendant refused to reimburse plaintiff its costs incurred in treating Biba on the basis of the release. On December 17, 2010, plaintiff filed a complaint against defendant in the 46th District Court seeking reimbursement under the no-fault act for its services and accommodations rendered to Biba as well as penalty interest, attorney fees, and a judgment declaring that defendant is liable for the no-fault benefits payable to plaintiff.

Plaintiff filed a motion for partial summary disposition arguing that the release did not bar its independent cause of action against defendant for the recoupment of no-fault benefits pursuant to state statutes. In response, defendant moved for summary disposition under applicable statutes. The defendant maintained that the release barred plaintiff’s claim. The trial court granted plaintiff’s motion and denied defendant’s motion on the basis that plaintiff had an independent cause of action against defendant and the release executed by Biba did not waive plaintiff’s separate cause of action. The district court entered a judgment in plaintiff’s favor in the amount of $12,450, inclusive of costs and attorney fees, plus interest in the amount of $1,623.60. On appeal, the circuit court affirmed the district court’s ruling based on the same reasoning.

LEGAL ANALYSIS

As a result of state statutes it is common practice for insurers to directly reimburse health care providers for services rendered to their insureds.  It is well established that an injured person entitled to no-fault benefits may waive that entitlement and release an insurer from payment of future benefits in exchange for a settlement.

Courts generally apply principles of contract law to disputes involving the terms of a release. The scope of a release is governed by the intent of the parties as it is expressed in the release. If the text in the release is unambiguous, the parties’ intentions must be ascertained from the plain, ordinary meaning of the language of the release.

The plain language of the release in this case states that, “[f]or the sole consideration of the amount of $35,000.00,” Biba “does hereby release and discharge” defendant “from any and all claims and demands for no-fault insurance benefits, of any kind whatsoever, for any and all expenses incurred to date and/or which may be incurred at any time in the future by or on behalf of” Biba arising out of the accident, including “any and all allowable expenses of any kind whatsoever for reasonably necessary products, services, and accommodations for [Biba’s] care, recovery, or rehabilitation, including, but not limited to, medical, . . . medication, . . . . skilled nursing care, . . . and/or skilled care from the date of the above accident through the present and/or which may be incurred at any time in the future.” Thus, the plain language demonstrates that, in exchange for defendant’s payment of $35,000, the parties intended to discharge defendant’s liability altogether, including its liability for future medical services. The language of the release is clear and unambiguous, and the parties’ intent, expressed in the release, governs its scope.

Biba’s argument that there is no evidence that any additional money was paid to cover future medical treatment is without merit. The language of the release plainly includes expenses related to future medical treatment in exchange for defendant’s payment of $35,000. Plaintiff also argues that by including in the release the provision allowing Biba to make a claim for expenses for accident-related care provided by the University of Michigan Health System, defendant preauthorized accident-related treatment up to July 6, 2010, nearly one year after the release was executed. Biba’s argument is without merit. The parties to the release bargained for a narrow exception to the bar on future benefits, and treatment at plaintiff’s facility does not fall under the exception. There is nothing ambiguous about the provision, which is limited to “accident-related medical care provided by the University of Michigan Health System . . . prior to July 6, 2010.” Because the provision is unambiguous, this Court cannot read anything additional into it.

Plaintiff Has A Remedy

The court noted that plaintiff is not without a remedy. Although Biba provided her insurance claim number on plaintiff’s intake form and indicated that bills should be sent to defendant, she also signed a form that stated, “I agree to pay in full any and all charges for medical services provided to me by [plaintiff] not otherwise covered by my Medicare, insurance company or carrier, or other payor.” Therefore, Biba agreed to be responsible for charges that defendant did not pay. Further, Biba checked “yes” on the intake form after the question “[i]s there a lawsuit involved?” Directly beneath the question, however, she stated, “it is over (done).” Therefore, plaintiff was on notice that the lawsuit had concluded and could have inquired into the terms of the settlement before treating Biba.

At a minimum, plaintiff could have contacted defendant to verify Biba’s assertion that defendant would cover her medical expenses. Biba even provided the insurance adjuster’s name and telephone number on the intake form. Accordingly, plaintiff could have verified Biba’s claimed entitlement to no-fault benefits, but failed to do so.

Moreover, upholding the lower court decisions would have a chilling effect on settlements of claims involving future no-fault benefits because the decisions effectively nullify Biba and defendant’s settlement. The parties did not intend such a result considering the clear language of the release.

ZALMA OPINION

A release is nothing more than a contract. If it is clear and unambiguous it will be enforced as written. Because of the way no-fault insurance is dealt with in states like Michigan medical services providers rely on direct billing to the insurer. They act as if their right is separate and apart from the claim of the patient.

This case makes it clear that the assumption is not correct. The right of the medical provider is derivative of the right of the patient. If the patient releases the insurer for a lump sum the patient gives up all rights to the money and the provider has no right to get money from the insurer. Fortunately, the patient, Biba, promised to pay the provider and they are not without a remedy.

Why the trial court gave the provider money in light of the clear language of the release is confusing to me and can only be put down to the public’s animosity toward insurers even when the insurer does everything it is required to do.

© 2013 – Barry Zalma

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

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

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

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

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Advertising Injury

Loss Must Be Due to Advertising for Coverage to Apply

Basic Research, LLC, along with related corporations and officers thereof (Basic Research), appealed the trial court’s grant of summary judgment in favor of Admiral Insurance (Admiral). Basic Research contended that in finding that Admiral had no duty to defend it against the underlying claims, the district court interpreted provisions of Basic Research’s insurance policy too narrowly. The Utah Supreme Court resolved the dispute in Basic Research, LLC, Dynakor Pharmacal, LLC v. Admiral Insurance Company, A Delaware Corporation, 2013 UT 6 (Utah 02/08/2013).

BACKGROUND

Basic Research is a limited liability company organized and existing under the laws of Utah. Its principal place of business is located in Salt Lake City, Utah. Basic Research markets the weight-loss product Akavar, using the slogans “Eat All You Want And Still Lose Weight” and “And we couldn’t say it in print if it wasn’t true!”

Customers who purchased Akavar filed lawsuits in multiple federal and state jurisdictions, all claiming false advertising, defective product, and/or failure to perform as promised (the underlying claims).

Basic Research was insured by Admiral under two consecutive Commercial General Liability insurance policies (the Policy). A portion of the Policy provided coverage for “Personal and Advertising Injury,” defined relevant terms, and contained a list of types of claims specifically excluded from coverage. After the underlying claims were filed, Basic Research invoked its coverage and asked Admiral to defend it. Admiral refused to defend because the underlying claims were not covered by the terms of the Policy.

ANALYSIS

In Utah, like almost every other state, an insurer has a duty to defend when the insurer ascertains facts giving rise to potential liability under the insurance policy. Where the allegations, if proved, show there is no potential liability under the policy, there is no duty to defend.

The question of whether there is potential liability in Utah under the policy is determined by comparing the language of the insurance policy with the allegations of the complaint. The question is whether the allegations, if proved, could result in liability under the policy. If the language found within the collective “eight corners” of these documents clearly and unambiguously indicates that a duty to defend does or does not exist, the analysis is complete.

The relevant portions of the Policy provide:

Coverage B – Personal and Advertising Injury Liability Insuring Agreement

We will pay those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” to which this insurance applies. We will have the right and duty to defend the insured against any “suit” seeking those damages. However, we will have no duty to defend the insured against any “suit” seeking damages for personal and advertising injury to which this insurance does not apply. We may, at our discretion, investigate any offense and settle any claim or “suit” that may result . . .

Section VI – definitions: “Personal and advertising injury” means injury, including consequential “bodily injury,” arising out of one or more of the following offenses: . . .

f. The use of another’s advertising idea in your “advertisement.”

Admiral argues that the phrase “those sums that the insured becomes legally obligated to pay as damages because of “personal and advertising injury” must be understood to limit its duty to defend to liability incurred as a result of “personal and advertising injury.”

Basic Research argues that the causes of action pled in the underlying claims fall within the Policy’s definition of “personal and advertising injury,” and specifically that the claims stem from “the use of another’s advertising idea.” Accordingly, Basic Research asks the court to require indemnification against claims of “personal and advertising injury” where the claim has some factual connection with Basic Research’s “use of another’s advertising idea” in its advertisement. In so doing, Basic Research ignores the definition of “personal and advertising injury” within the context of the coverage provision, creating ambiguity where there is none.

A contract term is not ambiguous simply because one party ascribes a different meaning to it to suit his or her own interests.

It is true that “personal and advertising injury” may factually arise out of the “use of another’s advertising idea.” But in order to trigger Admiral’s duty to defend, the underlying claims must allege “personal and advertising injury” that occurred as a result of the “use of another’s advertising idea.” Although the underlying claims asserted that Basic Research used the slogans “Eat All You Want And Still Lose Weight” and “And we couldn’t say it in print if it wasn’t true!,” the underlying causes of actions were in no way dependent on the source or ownership of those slogans. In fact, if the underlying claims were to go to trial, the plaintiffs would never be required to prove the original source of the slogans. They would need to prove only that Basic Research used the slogans to market a defective product.

None of the plaintiffs allege injury as a result of Basic Research’s having misappropriated or otherwise wrongfully used the advertising slogan of another. In interpreting a contract, the intentions of the parties are controlling.  To so interpret the Policy would expand the scope of the contractual terms beyond their plain meaning and the parties’ original intentions. Where the alleged damages do not legally arise out of the policyholder’s “use of another’s advertising idea,” the underlying claims do not obligate the insurer to indemnify.

In the instant case the “use” of the slogans is not the wrongdoing from which the underlying plaintiffs are claiming injury. Rather, they claim damages due to the allegedly false nature of those slogans and the resulting inducement to buy a defective product.

Basic Research has attempted to re-characterize the underlying claims, asserting that they do not allege injury from the class members’ failure to lose weight, but from their purchase of the product caused by the advertising. A claim of injury resulting from reliance on the slogans ultimately depends on whether those slogans were true or not. Indeed, at oral argument Basic Research conceded that what is alleged is simply that the product is advertised in a way that it cannot possibly perform. Again, the underlying claims do not depend on whether Basic Research owned or was otherwise entitled to use the slogans, but on whether the slogans constitute false advertising.

Exclusions

The policy also contained the following exclusion:

This insurance does not apply to: … 

g. Quality or performance of goods–failure to conform to statements: “Personal and advertising injury” arising out of the failure of goods, products or services to conform with any statement of quality or performance made in your “advertisement.”

The underlying claims assert injury and damages resulting from Akavar’s failure to live up to the promises of quality and performance expressed by the slogans.

CONCLUSION

After comparing the language of the Policy with the allegations in the underlying claims, the Utah Supreme Court concluded that the claims asserted are not covered by the Policy, and are in fact squarely excluded by its terms and that Admiral therefore has no duty to defend Basic Research.

ZALMA OPINION

Insurance protects against many risks of loss including, in a CGL, the risk of loss defined in the policy as a “personal injury” or an “advertising injury”. Insurance does not protect, nor can it, protect against every possible risk of loss. Although the insured’s advertising was allegedly false it was not the reason for which the insured was sued. It was the failure to lose weight after using the product that brought about the suit.

Counsel for the insured were imaginative and tried to bring the case within the meaning of the policy. Imaginative arguments, however, will always fail when there are no facts actually bringing the case within the wording of the policy.

© 2013 – Barry Zalma

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

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

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

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

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FIVE YEAR LATE NOTICE

Prejudicial or Not

1500 Coral Towers Condominium (“Coral Towers”) appealed a final summary judgment in favor of Citizens Property Insurance Corporation (“Citizens”) in a breach of contract action. The Florida Court of Appeal attempted to resolve the question in 1500 Coral Towers Condominium Association, Inc. v. Citizens Property Insurance Corporation, No. 3D12-132 (Fla.App. 02/06/2013).

FACTS

At the time of Hurricane Wilma, in October 2005, Coral Towers was insured under a commercial-residential property insurance policy with Citizens. Approximately five years after Hurricane Wilma, on June 29, 2010, Coral Towers notified Citizens for the first time that the property had sustained damages as a result of Hurricane Wilma. Pursuant to the terms of the insurance policy, Citizens requested Coral Towers to submit a sworn proof of loss within sixty days. Coral Towers did not submit the proof of loss within sixty days. In October 2010, Coral Towers brought suit for breach of contract alleging that it had properly and timely notified Citizens of the damages it had sustained to the condominium properties as a result of Hurricane Wilma. It also alleged that Citizens had denied its claim. Citizens filed an answer and asserted affirmative defenses alleging that Coral Towers had failed to give prompt notice of the alleged loss and had breached the following policy provisions:

4. You[r] Duties After Loss. In case of a loss to covered property, you must:

a. Give prompt notice to us, or your producer, who is to give immediate notice to us. . . .

d. Send to us, within sixty (60) days after our request, your signed, sworn proof of loss …

Citizens also asserted as an affirmative defense that Coral Towers was barred from recovery because it had failed to comply with conditions precedent to filing the lawsuit under the following policy provision:

15. Suits Against Us. No action can be brought unless the policy provisions have been complied with and the action is started within five (5) years from the date the loss occurs.

Three months after filing suit, Coral Towers provided the sworn proof of loss. The first opportunity Citizens had to inspect the property was in early August of 2010 almost five years after the loss.

In discovery, Coral Towers admitted knowledge of the loss in November 2005, and that a roofer had repaired the elevator, roof, and surrounding walls in December 2005. The roof continued to leak and Coral Towers obtained estimates to replace the roof. The latter of the estimates was for $259,269.20. The reason Coral Towers alleged it did not notify Citizens immediately after Hurricane Wilma was because initially there was a question of whether the damages would exceed the policy deductible.

In September 2011, Citizens moved for summary judgment on grounds that Coral Towers was barred from recovery as a result of the failure to give prompt notice and failure to provide a sworn proof of loss within sixty days. Citizens alleged that it was prejudiced by the inability to investigate and evaluate the claim under the policy. Coral Towers maintained that the type of damages it had sustained appeared over time and would not have necessarily evidenced themselves within the first two years after the Hurricane. The two issues addressed by the trial court and presented on appeal are whether Coral Towers’ notice of loss was timely and, if not, whether Citizens was prejudiced by the late notice.

There was no factual dispute that Coral Towers failed to give timely notice of the loss. When an insurance contract contains a provision which applies to submitting a proof of loss and notice of the damage claim, an insured must give notice of the loss that implicates a potential claim without waiting for the full extent of the damages to become apparent.

PREJUDICE

An insurer is prejudiced by untimely notice when the underlying purpose of the notice requirement is frustrated by late notice. Citizens alleges that the extended passage of time creates a very strong inference that Citizens’ investigation and defenses have been diminished as a result of the late notice. Also, it alleges that the repairs that were made without first notifying Citizens hampered the monitoring of, and efforts to coordinate, the mitigation of damages.

The court of appeal noted that whether or not the delay in investigating the damages was prejudicial to the insurance company is a question of fact for the jury.

Whether the prompt investigation would have enabled Citizens to determine the cause of the damage with greater certainty, to take steps to mitigate the damage, or whether it was placed in a substantial disadvantage to be prejudiced by the delay, present genuine questions of material fact that cannot be resolved on motion for summary judgment.

The the trial court’s grant of summary judgment on the issue of whether Citizens was prejudiced by the untimely notice was reversed and the issue of prejudice is factual and is not one to be determined on summary judgment and therefore remands to the trial court to determine whether the insurer was prejudiced.

The final summary judgment in favor of Citizens on the issue of the failure of the insured to give prompt notice was reversed for factual determination of the issue of whether or not Citizens was prejudiced by the delay in Coral Towers’ late notice.

ZALMA OPINION

This decision ignores the true meaning of a condition precedent that failure to fulfill a condition precedent loses the right to the contract. The complete fulfillment of a condition – whether the party asserting the condition is prejudiced or not – is essential to the enforcement of the contract. The insurer demanded a sworn proof of loss and did not receive it within the 60 days required by the policy even though the insured had five years to determine its loss.

The conditions of the policy regarding notice, proof of loss, and suit cannot be ignored. On the contrary, the law is clear that the conditions relating to notice and proof of loss are conditions precedent to suit. [McCormack v. N. British Ins.  Co., 78 Cal 468, 21 P 14 (1889); White et. al. v. Home Mutual Ins. Co., 128 Cal. 131, 60 P. 666 (1900); and Basle v. Pacific Indemnity, 200 Cal. App. 2d 207, 19 Cal. Rptr. 299 (1962).

These cases hold “in general, failure to file a proof of loss within the time limit is fatal to an action on the policy.”

In Texas, the Court of Appeals held:

The insurance policies required timely filing of the proof of loss form as a condition precedent to payment of the loss. The appellants were not obligated to make any payment to the Viles [insured] unless and until the condition was performed. See Brugette 728 S.W.2d at 764. Unless this condition was met or waived, we hold the appellants had ‘a reasonable basis for denial of claim.’ Security National Insurance v. William, 773 S.W.2d 68 (1989).

Florida treats insurance companies different than any other contracting party when dealing with a condition precedent. They should consider California and Texas, among others, that uphold the right of a party to enforce a condition precedent rather than rewriting the terms of the contract to add a requirement for “prejudice” before the insurer can enforce the condition.

© 2013 – Barry Zalma

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

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

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

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Read The Policy

Don’t Give Up Your Right to Damages from Tortfeasor

American States Insurance Company (“American States”) appealed to the Supreme Court of Appeals of West Virginia from an adverse jury verdict in an insurance coverage declaratory judgment action brought by Barbara Surbaugh (“Ms. Surbaugh”). American States contended that the circuit court erred in submitting the insurance coverage issue to a jury as a matter of law and erred in denying its motion for summary judgment in American States Insurance Company v. Barbara Surbaugh, Administrator of the Estate of Gerald Kirchner, No. 11-1186 (W.Va. 02/06/2013).

FACTUAL HISTORY

On or about June 6, 1997, Gerald Kirchner was accidentally shot and killed by Robbie Bragg. At the time of the shooting, Mr. Kirchner and Mr. Bragg were both employees of Grimmett Enterprises, a sporting goods store located in Rainelle, West Virginia. Grimmett Enterprises was owned by David Grimmett (“Mr. Grimmett”). Mr. Kirchner was shot accidentally while Mr. Bragg was showing a customer how to load a handgun that was for sale in the store.

The mother of Mr. Kirchner, Ms. Surbaugh, filed a wrongful death action against Mr. Bragg and a workers’ compensation deliberate intent cause of action against Grimmett Enterprises. In 2002, Mr. Bragg and Grimmett Enterprises entered into a settlement with Ms. Surbaugh. Under the terms of the settlement, Mr. Bragg and Grimmett Enterprises agreed to a judgment against them for $1.5 million. Ms. Surbaugh agreed to not execute the judgment against the defendants in exchange for the defendants assigning all claims they might have against their respective insurers for refusing to provide a defense and coverage. The trial court bifurcated the declaratory judgment action from the underlying wrongful death/deliberate intent action.  Ms. Surbaugh argued that an employee exclusion in the policy was ambiguous, was not conspicuous, and had not been brought to the attention of Mr. Grimmett. American States argued that the policy was unambiguous and conspicuous.

The evidence shows that, at some point in 1995, Mr. Grimmett opened a sporting goods store. The owner of the building where the store was going to be located informed Mr. Grimmett that he would have to obtain insurance. Mr. Grimmett contacted a New York agent of American States and made arrangements by phone to purchase a policy. Mr. Grimmett received the first policy in October 1995. The policy subsequently was renewed for the period October 1996 to October 1997. The shooting accident occurred during the second year of the policy.

First, the circuit court held as a matter of law that the exclusionary language contained in the policy was not ambiguous. Second, the court ruled that the issue of whether the exclusion was disclosed to Mr. Grimmett was to be resolved by a jury. A jury trial was held to determine coverage under the policy.

The only witness called during the trial was Mr. Grimmett. At the conclusion of the evidence, the case was submitted to the jury with a special verdict form that had only one question: “Was the exclusionary language at issue in this case brought to the attention of the insured, Grimmett Enterprises, Inc.”

The jury returned a verdict answering the question in the negative. The trial court thereafter entered a final order concluding that, based upon the jury’s answer to the special verdict question, the employee policy exclusion was unenforceable.

DISCUSSION

Whether a Policy’s Exclusionary Language Was Brought to the Attention of an Insured

The trial court determined that it was for the jury to decide whether the exclusionary language at issue in this case was brought to the attention of Mr. Grimmett. American States argued below, and in this appeal, that this issue was for the trial court and not a jury.

The Supreme Court of West Virginia has previously held that “when a declaratory judgment proceeding involves the determination of an issue of fact, that issue may be tried and determined by a judge or jury in the same manner as issues of fact are tried and determined in other civil actions.” Erie Ins. Prop. & Cas. Co. v. Stage Show Pizza, 210 W. Va. 63, 66, 553 S.E.2d 257, 260 (2001).

Issues of fact, that are normally tried by a jury, may be submitted to a jury in a declaratory judgment action. However, in the context of a declaratory judgment action to determine insurance coverage, generally the issues presented are for the trial court to decide. Only if the court makes the determination that the contract cannot be given a certain and definite legal meaning, and is therefore ambiguous, can a question of fact be submitted to the jury as to the meaning of the contract.

A court should read policy provisions to avoid ambiguities and not torture the language to create them. If a court properly determines that the contract is unambiguous on the dispositive issue, it may then properly interpret the contract as a matter of law and grant summary judgment because no interpretive facts are in genuine issue.

The policy’s coverage section clearly stated that it was subject to various exclusions. The portion of the insurance policy titled “Commercial General Liability Coverage Form,” which contains the relevant exclusionary language, cautions in its first sentence that “[v]arious provisions in this policy restrict coverage. Read the entire policy carefully to determine rights, duties and what is and is not covered.”

In this case the language of the policy exclusion was set out as follows:

B. EXCLUSIONS

1. A  Applicable to Business Liability Coverage -

This Insurance does not apply to:

e. “Bodily injury” to:

(1) An employee of the insured arising out of and in the course of employment by the insured; or (2) The spouse, child, parent, brother or sister of that employee as a consequence of (1) above. This exclusion applies: (a) Whether the insured may be liable as an employer or in any other capacity; and (b) To any obligation to share damages with or repay someone else who must pay damages because of the injury. [Emphasis added]

In Ms. Surbaugh’s motion for summary judgment she argued that this exclusion was ambiguous. Ms. Surbaugh contended that the exclusion could be read to mean that the employer had to cause the injury. To support this assertion, Ms. Surbaugh submitted an affidavit by Mr. Grimmett, in which he stated that when he read the exclusion after the accident, he thought that it meant that he, as the employer, had to cause the injury. Ms. Surbaugh also presented deposition testimony of a linguistics expert, who opined that the exclusion was ambiguous.

The trial court’s order addressed the issue as follows: “This Court rules as a matter of law that the policy language is not ambiguous.”

The exclusion was conspicuous.

Ms. Surbaugh contended below that the exclusion was not conspicuous because the policy did not contain a table of contents. Obviously, a table of contents would be helpful in understanding any insurance policy, but such helpfulness has not been mandated by the Supreme Court, nor has Ms. Surbaugh pointed to any statute or regulation requiring the same.

The relevant exclusion in this case is found on page two of this policy Form. The policy sets out the exclusion section in bold, capital letters that use a larger font size than the substantive material. The employee exclusion is the fifth exclusion on the page.

The Supreme Court also noted that failing to read a policy is not sufficient reason to hold a clear and conspicuous policy provision unenforceable. To hold otherwise would turn both contract and insurance law on its head. Insurers are not required to sit beside a policy holder and force them to read (and ask if they understand) every provision in an insurance policy. The insured cannot escape the effect of the conditions of a policy on the ground of ignorance, due to failure to read his policy, it being his duty to examine it.

CONCLUSION

In view of the foregoing, the circuit court’s order of June 30, 2011, which entered judgment in favor of Ms. Surbaugh based upon a jury verdict, was reversed. The case was remanded with instructions that the circuit court enter summary judgment in favor of American States in the bifurcated declaratory judgment part of the action.

ZALMA OPINION

Much to my surprise another plaintiff chose to seek damages from an insurer and relieve the tortfeasor (a business owner who had assets) of the obligation to pay damages believing it is easier to sue and collect from an insurer. The trial court made the decision appear correct only to have defeat drawn from the jaws of victory by the Supreme Court.

The Supreme Court reversed because the exclusion was clear and unambiguous and available for the insured to read and understand before a loss rather than after with the need to obtain coverage. To do otherwise would require insurers to do the impossible and sit beside each policy holder and force them to read (and ask if they understand) every provision in an insurance policy.

© 2013 – Barry Zalma

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

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

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

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

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Primary v. Excess

Additional Insured Did Not Procure Policy

A New York trial court granted plaintiffs’ motion for summary judgment declaring that defendant Lincoln General Insurance Company (‘Lincoln General”) has a duty to defend East 51st Street Development Company, LLC and to reimburse Illinois Union Insurance Company (“Illinois Union”) for past defense costs in the underlying crane collapse litigation from the date of the crane collapse to the date that Lincoln General exhausted its policy limits. The trial court declared that defendant AXIS Surplus Insurance Company (“Axis”) also has a duty to defend East 51st Street and to reimburse Illinois Union for past defense costs and to pay all future defense costs in the crane-collapse litigation.

A New York Appellate Court was asked to resolve the appeals of all the parties in In Re East 51st Street Crane Collapse Litigation v. Lincoln General Insurance Company, Defendant-Respondent-Appellant, Axis Surplus Insurance Company, et al, No. 7256- (N.Y.App.Div. 02/05/2013).

FACTS

On March 15, 2008, a crane collapsed at a construction site on East 51st Street in Manhattan, causing the deaths of six construction workers and a pedestrian, injury to several other individuals, and extensive damage to property. Multiple claims for bodily injury and property damage were brought against plaintiff East 51st Street, the owner of the property on which the accident occurred, Reliance Construction Ltd. (“Reliance”), the construction manager on the project, and Joy Contractors, Inc. (“Joy”), and the superstructure subcontractor, whose employee was operating the crane at the time of the accident.

THE INSURANCE

It was undisputed that the insurance policies issued by AXIS and  Interstate Fire and Casualty Company (“Interstate”) to Reliance and the policy issued by Lincoln General to Joy were primary to the policy issued by Illinois Union to East 51st Street. Although Illinois Union had already taken up East 51st Street’s defense, its intent to seek contractual indemnification from Reliance and Joy created a potential conflict between East 51st Street and Lincoln General, giving East 51st Street the right to obtain independent counsel.

The “Supplementary Payments” provision of the AXIS policy issued to Reliance states that “[w]e will pay, with respect to any claim we investigate or settle, or any suit’ against an insured we defend[] … [a]ll expenses we incur,” and that “[t]hese payments will reduce the limits of insurance.” However, the amended Insuring Agreement of the policy provides that AXIS’s “duty to defend ends when [AXIS has] used up the applicable limit of insurance in the payment of judgments or settlements under Coverages A or B [i.e., damages].”

ANALYSIS

The appellate court found an ambiguity as to whether “expenses” includes defense costs that result from conflicting provisions and concluded the language of the policy must be construed against AXIS.

Interstate’s contention that East 51st Street is not listed on the additional insured endorsement or the declarations page of the policy issued to Reliance failed because it admitted in its answer that East 51st Street was an additional insured under that policy.

Interstate has demonstrated that its policy was exhausted upon its July 2009 settlement with Reliance of the declaratory judgment action commenced in federal court which sought defense and indemnity for several lawsuits relating to the crane accident. The settlement agreement clearly states that Interstate’s payment of $1 million to Reliance was in settlement of all of Interstate’s indemnification and defense obligations under the policy and that the settlement “exhausts all potentially applicable Interstate Policy limits and all coverages. . .”

Because it found Interstate’s policy was exhausted by the $1 million settlement other issues raised by the parties became moot.

The policy clearly provides that failure by the named insured to comply with conditions of that endorsement will reduce the limits of coverage for “all insureds” and, accordingly, any failure of Reliance to comply with the contractors’ conditional endorsement reduced the coverage for Reliance as well as its additional insureds.

DECISION

Pursuant to the “Other Insurance” provision in the AXIS, Lincoln General and Interstate policies, the insurance provided to East 51st Street, an additional insured on those policies, is primary regardless of the “Additional Insured” endorsement in the AXIS policy, which provides that “such insurance as is afforded by this policy for the benefit of [East 51st Street] shall be primary insurance as respects any claim, loss or liability arising out of [Reliance’s] operations, and any other insurance maintained by [East 51st Street] shall be excess and non-contributory with the insurance provided hereunder.”

A reasonable business person would understand the term “insurance maintained by” to refer to insurance actually procured by East 51st Street (the Illinois Union policy), rather than afforded it as an additional insured. Although, as Interstate points out, a low premium suggests that a policy may not be primary, it is not conclusive.

The language of the Interstate policy does not establish the policy as a pure excess policy.

ZALMA OPINION

Additional insured endorsements become a problem in massive damage cases like this crane collapse case. Interpretation of the multiple policies and multiple insureds and additional insureds become a nightmare for the claims personnel and their counsel. In this case, the Appellate Department of the New York Supreme Court – in a short opinion – agreed that the primary insurer’s limits had been exhausted and that the insurers who had agreed to make the defendant additional insured, were all primary and owed a defense to the insured.

The lesson learned is that in massive tort cases like that involving the crane collapse, is that all the insurers should work together to provide a defense and indemnity to the insured and sort out their differences after all the tort cases are resolved. Regardless of the wording of the policies a court will do everything possible to provide as much insurance as possible to indemnify the injured and heirs of the deceased.

© 2013 – Barry Zalma

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

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

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

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

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Aggravated Assault Not an Occurrence

No Coverage For Intentional Beating

The Sixth Circuit Court of Appeal was asked to determine if Liberty Mutual Fire Insurance Company was required to indemnify an insured who had been convicted of battery. Liberty Mutual filed a declaratory judgment action in the United States District Court for the Western District of Kentucky seeking an order that it owed nothing to its insured.

In Liberty Mutual Fire Insurance Company v. Kenneth R. Harris and Kathryn L. Harris, No. 11-5548 (6th Cir. 02/05/2013) Liberty Mutual sought a declaration that the homeowner’s policy it issued to Kenneth and Kathryn Harris did not cover a physical altercation between Kenneth Harris (“Harris”) and Bunker.

FACTS

The underlying altercation occurred in September 2006 in Scottsdale, Arizona. At the time of the incident, Harris was 73 years old and Bunker was 61 years old. Harris was subsequently prosecuted and convicted of two counts of aggravated assault.

In addition to the criminal action, Harris was also subject to a civil action in the Arizona courts, which ultimately led to this lawsuit. Bunker sued Harris in the Arizona courts over the altercation. The Harrises notified Liberty Mutual about the lawsuit. Liberty Mutual declined to provide coverage. Because Harris did not respond to Bunker’s motion for summary judgment, Harris was found liable for negligence, assault, battery, and intentional infliction of emotional distress. A trial on the damages resulted in a judgment in Bunker’s favor for approximately $500,000.

Bunker filed several suits attempting to collect the judgment, including a garnishment proceeding in the Arizona courts against Liberty Mutual and an action in the Kentucky courts to register the Arizona judgment and secure a judgment lien against Harris’s assets in Kentucky.

Harris and Bunker entered into an agreement in which, in part, Harris assigned to Bunker any rights and claims Harris had against Liberty Mutual.

Liberty Mutual then initiated this lawsuit in federal court. Liberty Mutual filed, and prevailed, on a motion for declaratory judgment. The district court denied Bunker’s request for a continuance. Bunker filed this appeal.

ANALYSIS

The district court carefully analyzed the language of the homeowner’s policy and Kentucky law. The district court relied on an opinion of the Kentucky Supreme Court, Cincinnati Insurance Co. v. Motorists Mutual Insurance Co., 306 S.W.3d 69, 73 (Ky. 2010), in which the Court concluded that a commercial general liability policy did not provide coverage for faulty workmanship. The policy defined the word “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Because the policy did not define the word “accident,” the Kentucky Supreme Court gave that word its plain and ordinary meaning.

The Kentucky Supreme Court held that, inherent in the plain meaning of the word “accident” is the doctrine of fortuity, which consists of two central aspects: intent and control. The district court correctly noted that the word “occurrence” in the homeowner’s policy was the same as the definition of “occurrence” in the policy in Cincinnati Insurance. Following Cincinnati Insurance, the district court gave the word “accident” its plain and ordinary meaning, and applied the doctrine of fortuity. The district court held that the underlying altercation or incident between Harris and Bunker was not an occurrence, as that term is defined under the homeowner’s policy. The district court noted that no party had argued that Harris lost control of his own body during the altercation when Bunker was injured and intended to cause the injuries Bunker suffered.

In this situation, Harris’s intent, or lack of intent, to cause injury during the underlying altercation does not determine whether the policy provides coverage. The policy language on which Bunker relies falls under the portion of the policy excluding from coverage any bodily injury that is expected or intended by an insured. Where a policy does not initially provide coverage, a court need not consider the application of an exclusion.

The district court did not err in granting Liberty Mutual’s motion for declaratory judgment after finding that the homeowner’s policy did not provide coverage for the underlying altercation between Harris and Bunker.

Without dispute, a physical altercation, a fight, occurred between Harris and Bunker. The record contains no assertion by any party, and no evidence to support such an assertion, that Harris did not or could not control his actions during the altercation. Applying these facts to the language of the policy, under Kentucky law, the Sixth Circuit concluded that there was no occurrence that triggered coverage.

ZALMA OPINION

The finding of the Sixth Circuit seems obvious. A jury found that the 71-year-old Harris intentionally beat up the younger Bunker and caused him injury. Since he could not have been convicted of the crime of aggravated assault for accidentally causing injury to Bunker there was no fortuitous event nor was there an accident. No liability insurance policy covers intentional criminal conduct of an insured.

What this case also teaches is that attempting to get insurance money for such a situation when the defendant has assets that could be attached to satisfy a judgment is not a wise choice. Unless Harris had no assets this effort on the part of Mr. Bunker to collect his $500,000 judgment was a wasted effort and, in doing so, gave up the right to collect the judgment from Harris and his assets.

© 2013 – Barry Zalma

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

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

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

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

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One Occurrence – One Limit

Plaintiffs Should Not Limit Recovery to Insurance

A New York appellate court was called upon to determine the meaning of a non-cumulation clause in a commercial general liability policy when two children, at different times, were exposed to the same lead paint in an apartment building owned by the insured/defendant in Jannie Nesmith, In Her Representative Capacity Only As Parent and Natural Guardian of v. Allstate Insurance Company, No. 1252 CA 12-00182 (N.Y.App.Div. 02/01/2013). The issue presented to the court was whether more than one policy limit could be used to defend and indemnify the insured.

FACTS

Plaintiffs commenced this action seeking a declaration of the rights of the parties to an insurance policy. In November 1991, defendant issued the policy to Tony Clyde Wilson, the owner of an apartment building in the City of Rochester. The policy, which had a per-occurrence limit of $500,000, was for one year, and it was renewed for two additional one-year periods.

In 1993, two children were exposed to lead paint while living in an apartment in that building, and one suffered injuries as a result of that exposure. According to Wilson’s deposition testimony, he attempted to remediate the lead paint condition after learning that the children had been exposed to lead, although the record is unclear with respect to the exact actions that he undertook. That family moved out of the apartment shortly thereafter, and the mother of those children later commenced an action against Wilson, seeking damages for injuries that the child sustained as a result of her exposure to lead (first tort action). In 1994, two children of a subsequent tenant were also exposed to lead in the same apartment. Plaintiffs commenced a separate action to recover damages for the personal injuries sustained by those two children (second tort action). While the second tort action was pending, the first tort action settled for $350,000, which defendant paid pursuant to its policy.

Defendant took the position that the noncumulation clause in the policy limited its liability for all lead exposures in the apartment to a single policy limit of $500,000, and offered plaintiffs the remaining $150,000 of coverage to settle the second action.

The parties entered into a stipulation whereby Wilson was released from liability. They further agreed that plaintiffs would recover $150,000 if the noncumulation clause limited recovery to a single policy limit as claimed by defendant, but plaintiffs would recover $500,000 if the policy also required defendant to pay the full policy limit for the injuries sustained by the second set of children.

ANALYSIS

At issue on this appeal is whether the policy requires defendant to pay a second full policy limit under these circumstances or whether plaintiffs’ losses are encompassed by the $500,000 per occurrence limit in the insurance policy.

The appellate court’s analysis, as with all insurance disputes, begins with the well-settled proposition that unambiguous provisions of an insurance contract must be given their plain and ordinary meaning, and the interpretation of such provisions is a question of law for the court.

The policy provision at issue states:

“Regardless of the number of insured persons, injured persons, claims, claimants or policies involved, our total liability under the Family Liability Protection coverage for damages resulting from one accidental loss will not exceed the limit shown on the declarations page. All bodily injury and property damage resulting from one accidental loss or from continuous or repeated exposure to the same general conditions is considered the result of one accidental loss” (emphasis omitted).

The mere fact that the property owners renewed their policy for two additional policy periods does not permit the plaintiffs to recover more than a single policy limit. The clear language of the policy, the number of claims and claimants does not require the insurer to pay more than its single policy limit.

The appellate court’s determination turned on the resolution of the discrete issue whether the exposure of children to lead paint in an apartment during different tenancies is encompassed by the phrase “resulting from . . . continuous or repeated exposure to the same general conditions” in the noncumulation clause. The appellate court concluded that the only reasonable interpretation of that clause requires that the two claims be classified as a single accidental loss within the meaning of the policy.

The evidence established that the two sets of children lived in the same apartment at different times, less than a year apart. Although the owner testified at a deposition that he attempted to remediate the lead hazard, there is nothing in the record establishing that he removed all of the lead paint from the subject apartment.

Since there was no evidence that the owner added other lead paint to the apartment in the interim, and indeed paint containing lead could not legally have been sold anywhere in the United States for more than 15 years prior to that time, the evidence established that the lead paint that injured the second set of children is the same lead paint that was present in the apartment when the first set of children lived there.

Although the children may have ingested the lead at different times and their blood tests showed different levels of exposure, the injuries all flowed from the same conditions in their immediate environment. The noncumulation clause limits the plaintiffs in the first and second tort actions to a single policy limit. The appellate court ordered judgment should be granted in defendant’s favor, declaring that plaintiffs’ losses are encompassed by the $500,000 per occurrence limit in the insurance policy at issue and that plaintiff, by the stipulation, may recover no more than $150,000.

ZALMA OPINION

This case establishes that the owner of the slum building with flaking lead paint that injured children had better lawyers than those representing the injured children. Seeking to recover from the insurer the plaintiffs let the owner of the property — who at least had the value of the building as an asset — free from liability to gain money from an insurance company.

If the child was truly injured to an amount equal to or in excess of $500,000 counsel for the children should have obtained advice from a coverage lawyer about the viability of the claim for more than one limit and investigated the assets of the defendant to determine if he was capable of paying a judgment in excess of his policy limits.

Cases of this type are usually quite valuable to the plaintiff since juries are not pleased by defendants who poison children with lead. To limit recovery to the policy when there are assets available is unconscionable.

© 2013 – Barry Zalma

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

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

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

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

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Premium Audit or Prosecution

Employees Must Be Protected

The Connecticut Court of Appeal was asked to resolve a dispute between a roofer and its insurer in National Fire Insurance Company of Hartford v. Beaulieu Company, LLC, No. (AC 33612) (Conn.App. 02/05/2013) that was more akin to an Abbot & Costello comedy routine known as “who’s on first.”

The case came to the court of appeal when Beaulieu Company, LLC (“Beaulieu”), appealed from the judgment of the trial court rendered in favor of the plaintiff, National Fire Insurance Company of Hartford, also known as the CNA Insurance Companies (“CNA”), in connection with the underlying civil action in which CNA sought from Beaulieu unpaid premiums for workers’ compensation insurance coverage. Beaulieu claimed that it was clearly erroneous for the trial court to find (1) that three workers who performed roofing work for Beaulieu were employees of Beaulieu rather than independent contractors, (2) that even if these three workers and two others were not employees, they engaged in work that could make CNA liable to provide workers’ compensation benefits under the relevant policies and (3) assuming the workers had employees, the employees were not independently insured because Beaulieu provided certificates of insurance during the hearing in damages showing that the workers and any of their employees were already insured.

FACTS

Beaulieu is a roofing contractor that performs work primarily for commercial construction projects. It uses its own employees, contract labor and subcontractors to conduct its work. CNA, a workers’ compensation insurance carrier, provided workers’ compensation coverage to Beaulieu under two policies for the periods of March 26, 2005, to March 26, 2006, and April 3, 2006, to June 26, 2006.

In its memorandum of decision, the trial court stated: “Because it is difficult to predict exactly how much labor will be needed during an upcoming policy period and because workers’ compensation insurance premiums are based on the type of labor and amount of time expended by various workers for a particular job, the insurer prepares an estimated bill at the beginning of the policy term. After the term expires, the insurer audits the insured’s payroll and expenditures to calculate the precise coverage which was provided and the appropriate premium for that coverage. Depending on whether the estimated premium was excessive or deficient, a refund or a supplemental bill issues.” “The audit determines the amount of compensation paid during the policy term for each occupation and uses a formula to arrive at the adjusted premium, retrospectively.” The insurer calculates the final premium using an insurance industry manual that assigns specific rates for different occupations, which vary based on the risk of injury associated with that occupation.

On June 24, 2009, CNA sued Beaulieu for unpaid premiums owed for workers’ compensation coverage it provided to Beaulieu under the previously mentioned policies. In its complaint, CNA alleged that Beaulieu breached its insurance contract with CNA by failing to pay the premiums for these policy periods. The dispute between the parties concerns whether certain workers to which the rate was applied ought to have been included in the premium recalculation. The parties stipulated that Beaulieu owed $49,807 in premiums, but disputed an additional $46,529 in premiums for workers’ compensation coverage provided to the roofers; and to Mike Rome, all of whom performed roofing work for Beaulieu.

THE TRIAL COURT DECISION

In a memorandum of decision issued on May 20, 2011, the court concluded that the coverage provided by CNA to Beaulieu embraced employees of Beaulieu, contract labor of Beaulieu and employees of subcontractors of Beaulieu, unless the sub-contractors provided workers’ compensation coverage for its employees. Beaulieu’s records showed that the workers did not have independent workers’ compensation insurance during the policy terms at issue. Beaulieu submitted to CNA certificates of insurance for the workers, but the certificates were silent as to who was covered under the independent insurance policies. An audit manager who oversaw Beaulieu’s account for CNA investigated each policy and determined that the policies failed to cover the workers or failed to provide coverage during the effective period of CNA’s policies that are the bases for its breach of contract claim.

ANALYSIS

In determining whether the terms of an insurance policy are clear and unambiguous, a court will not torture words to import ambiguity where the ordinary meaning leaves no room for ambiguity. Similarly, any ambiguity in a contract must emanate from the language used in the contract rather than from one party’s subjective perception of the terms.

Based upon review of the court’s memorandum of decision the court of appeal concluded that the court did not make an express finding that the workers were employees but, rather, found only that they “all fit within part five C 2 of the insurance policy in that they engaged in work that could make CNA liable to provide workers’ compensation benefits.” It was sufficient for the court to find that the workers fell under the policies because they engaged in work that could make CNA liable to provide workers’ compensation benefits.

Evidence of the following facts relevant to this claim was presented at the hearing in damages. The contested “independent contractors” did roofing work for Beaulieu and worked on a number of different jobs. They received individual payments by the hour or by square. Payment by the hour is indicative of employee status. Beaulieu would direct some of the workers on how they should do work at times so Beaulieu could ensure that the work was done according to its contract with the owner of a particular property. Beaulieu would verify that the work done by the workers was performed properly before issuing payment. One was paid in two different ways during the policy terms. During one portion of the term, Beaulieu paid him as an employee, and he received a W-2 form indicating his tax withholdings. During another portion of the term, Beaulieu paid him outside of the regular payroll on a 1099 basis.

Under the act, an employer must secure workers’ compensation for its employees.

The fundamental distinction between an employee and an independent contractor depends upon the existence or nonexistence of the right to control the means and methods of work. It is the totality of the evidence that determines whether a worker is an employee under the state statutes not subordinate factual findings that, if viewed in isolation, might have supported a different determination. The test of the relationship is the right to control. It is not the fact of actual interference with the control, but the right to interfere, that makes the difference between an independent contractor and a servant or agent.

Beaulieu’s entire claim is predicated on its conclusory contention that the workers were sole proprietors, and, therefore, were not subject to the act unless they affirmatively elected to be covered. Without more than Beaulieu’s bald assertion that these workers were sole proprietors, the court concluded that the trial court did not err in finding that CNA could have been exposed to liability under the policies, even in the absence of evidence demonstrating that the workers affirmatively elected to be covered under the act.

Last, Beaulieu claimed that, assuming the workers had employees, it was clearly erroneous for the court to find that the employees were not independently insured because it provided certificates of insurance during the hearing in damages showing that the workers and any of their employees were already insured. Beaulieu argues that, therefore, these workers should not have been included in the premium audit because, upon its showing of proof of coverage, it was exempt, per the terms of the policy, from having them included in the audit. See footnote 5 of this opinion.

The court was entitled, as the trier of fact, to credit the audit manager’s testimony and disregard other conflicting testimony from Beaulieu. As such, it was reasonable for the court to find that Beaulieu failed to provide proof that the workers in this case lawfully secured their workers’ compensation obligations for their employees, and, therefore, failed to exempt itself from having them included in the plain-tiff’s premium audit. Because the trial court was in the best position as the fact finder to assess the credibility of the witnesses at the hearing in damages and draw inferences therefrom, we, as the reviewing court, defer to the court’s finding in this regard and find no error.

ZALMA OPINION

Beaulieu should consider itself lucky that it was only required to pay the additional premium required for the employees and workers who were covered under the CNA policy. In states like California, avoiding premium by misclassifying or failing to report employees to a workers’ compensation is a felony that could result in the employer facing five years in state prison. Since the evidence in this case even included one person who was paid as an employee and received a W-2 at the end of the year it was clear that Beaulieu was attempting to avoid paying appropriate premium.

For example, it is a felony in California to “Make or cause to be made a knowingly false or fraudulent material statement or material representation for the purpose of obtaining or denying any compensation…”

© 2013 – Barry Zalma

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

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

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

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

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No Third Party Direct Action in Kentucky

Clear Exclusion Defeats Coverage

The intent of commercial general liability policies is to protect against the unpredictable and potentially unlimited liability that can result from accidents causing injury to other persons or their property. A commercial general liability policy does not cover the insured’s obligations under a workers’ compensation policy or bodily injury to the insured’s employees arising out of the employment.

Bonnie Pryor appealed the trial court’s decision that granted Colony Insurance Company’s motion for summary judgment. In its decision, the trial court determined that the language in the commercial general liability insurance policy excluded coverage for Glenn Pryor’s death. The Kentucky Court of Appeal resolved the issue in Bonnie Pryor v. Colony Insurance, No. 2012-CA-000227-MR (Ky.App. 02/01/2013).

FACTUAL BACKGROUND

Greg Rucosky owns and operates an excavating, hauling, and logging business called Newcastle Hauling, LLC (hereinafter “Newcastle Hauling”). On November 4, 2009, Glen Pryor was hauling timber for Newcastle Hauling on a farm, which is owned by Melvin and Linda Seiter. He was operating a skidder, which rolled over and crushed him to death. Although Glenn Pryor’s status in performing this work is disputed, it is acknowledged that he was not an employee of Newcastle Hauling.

To provide insurance coverage for Newcastle Hauling, Rucosky had purchased a commercial general liability (hereinafter “CGL”) insurance policy from Colony Insurance Company (hereinafter “Colony Insurance”). The main liability coverage language in the insurance policy included an “employer’s liability” exclusion, which precludes coverage for liability arising out of injuries to employees. Later, after the initial procurement of the insurance policy, Colony Insurance broadened the policy’s exclusion by the addition of a “contractors coverage limitations” endorsement. This endorsement expressly barred coverage for liability arising out of injury to anyone “performing duties related to the conduct of the insured’s business.”

The widow, Bonnie Pryor, individually, and as executrix of his estate, instituted a lawsuit against Newcastle Hauling, Greg Rucosky, Melvin and Linda Seiter, and Colony Insurance. In the complaint, she alleged that Glenn Pryor was working as an independent contractor for Newcastle Hauling to haul timber away from the Seiters’ farm when he was killed in the accident. The lawsuit alleges two types of claims. First, it seeks to impose liability in tort against Rucosky, Newcastle Hauling, and the Seiters. Additionally, Pryor asks for a declaration that Colony Insurance owes coverage, not to her, but to Rucosky and Newcastle Hauling.

Colony Insurance filed a motion for summary judgment asserting that Pryor’s suit was an impermissible direct action, the claims were barred by a “no action” clause in the policy, and coverage was precluded by the “contractors coverage limitations” endorsement. The trial court granted Colony Insurance’s motion for summary judgment. Based on the language in the “contractors coverage limitations” endorsement, the trial court decided that, even applying a liberal construction to the pertinent language, the incident, which is the subject of this action, is not covered under the policy. Further, in making this decision, the trial court determined that the exclusionary language in the “contractors coverage limitations” endorsement was dispositive and did not address whether it was an impermissible direct action or whether the claims were barred by the policy’s “no action” clause.

ISSUES

On appeal, Pryor maintains that the trial court erred in its decision because the “employer’s liability exclusion” language is deceptive, susceptible to two interpretations, and ambiguous; and also, the trial court erred because it did not consider Glenn Pryor’s status as an independent contractor in the context of the “employer’s liability” exclusion, failed to note that an independent contractor cannot be an employee under Kentucky law, and hence, did not properly interpret the ramifications of the “employers’ liability” exclusion as it relates to an independent contractor. In essence, she contends that an independent contractor is not analogous to a temporary worker as defined in the “employer’s liability” exclusion and, since Glenn Pryor was an independent contractor, he was covered by the CGL policy.

Colony Insurance issued to Rucosky and Newcastle Hauling a CGL policy that had a standard “employer’s liability” exclusion that precluded coverage for liability arising out of injuries to employees. In addition, according to Colony Insurance, the “employer’s liability” exclusion was broadened by a “contractors coverage limitations” endorsement, which was later added to the policy. The plain meaning of the language in the endorsement provides that it prevails over the language in the original policy. Does the language in the endorsement broadening the “employer’s liability” exclusion and its definition of “temporary worker” exclude coverage for Glenn Pryor based on his status and the services rendered by him? Significantly, in answering that question, the court of appeal noted that the language of the endorsement expressly barred coverage for liability arising out of injury to anyone “performing duties related to the conduct of the insured’s business” and that the definition of “temporary worker” is modified by a new clause “not an ‘employee’ or ‘volunteer worker.'”

While it is true that an independent contractor under Kentucky workers’ compensation jurisprudence is not an employee, but he is also not relegated to the status of a member of the public. The plain meaning of the language in the “contractors coverage limitations” endorsement provides that coverage is not available for one “performing duties related to the conduct of any insured’s business.”

This language is not ambiguous or deceptive nor does it render the CGL policy meaningless.  Generally, a CGL policy protects the insured from tort liability for physical injury to the person or property of others. That is the purpose of Colony Insurance’s CGL policy, and Pryor’s assertion that no one is covered by Colony Insurance’s policy is unsound.

To ascertain the meaning of an insurance contract a court must begin with the text of the policy itself. The words employed in insurance policies, if clear and unambiguous, should be given their plain and ordinary meaning.

The language and its meaning are clear in the endorsement. Pryor is a temporary worker; that is, he was not an “employee” or “volunteer worker,” and he was “performing duties related to the conduct of any insured’s business.”

DIRECT ACTION

The trial court ascertained that because the language of the insurance contract excluded coverage for Glenn Pryor, it did not need to address the two remaining issues. Nonetheless, since the courts review was de novo and because Colony Insurance raised the argument, the court found it necessary to address whether Kentucky jurisprudence allows direct action by an injured third party against an alleged tortfeasor’s insurance company.

A third party cannot make a claim under state unfair claims statutes for the purpose of establishing coverage. Therefore, Pryor cannot avail herself of a bad faith action in order to establish that insurance coverage was available.

ZALMA OPINION

Tragic facts often result in creative lawsuits that attempt to change the reading of the law and provide a poor widow with the proceeds of an insurance policy. Mrs. Pryor, and her creative lawyers, tried to get to Colony in two ways – by suing directly claiming bad faith and by attempting to find an ambiguity in a clear and unambiguous exclusion. Both efforts failed because Kentucky does not allow third party claimants to sue the tortfeasor’s insurer directly (regardless of how the cause of action is drafted) and because the Kentucky courts, like those across the country, will not create an ambiguity where none exists just because they feel sorry for Mrs. Pryor’s loss.

© 2013 – Barry Zalma

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

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

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

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

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Fraud Continues and Destroys Insurer

Zalma’s Insurance Fraud Letter February 1, 2013

Continuing with the third issue of the 17th year of publication of Zalma’s Insurance Fraud Letter (ZIFL) Barry Zalma reports in the February 1, 2013 issue on the state of Rhode Island removed the license of an insurance agent and broker who was involved in fraudulent activities; on the success of a New Mexico insurance official’s whistleblower lawsuit against the then insruance commissioner; how the death master database continues to balance California’s budget; how an insurer was bankrupted as a result of fraud; and a report from the NICB about the movement of organized crime into insurance fraud.

ZIFL notes that health insurance fraud convictions are meager so far this year and can express no reason for the lack of successful prosecutions.

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

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

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

Zalma on Insurance

•    Contract Terms Must Be Honored
•    Life Insurance Investment Fraud Fails
•    Mental Gymnastics Not Allowed to Find Ambiguity
•    Failure to Appear For EUO — Prejudice Required
•    Statute Trumps Contract
•    Insurance is Not A Government Benefit
•    Clear and Unambiguous Exclusion Must be Enforced
•    Non-Trucking Use Coverage
•    Copyright Not Given Up by Performance
•    Another Brilliant and Short Opinion From New York

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

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

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

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

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

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Contract Terms Must Be Honored

 

Insurance Proceeds to Owner of Crashed Airplane

McCraw Materials, LLC, Mayfield McCraw, and Brenda McCraw (collectively “McCraw”), appealed the trial court’s entry of a Partial Summary Judgment that awarded DivLend Equipment Leasing, LLC (“DivLend”), a $403,750 insurance payment and attorney’s fees. In Mccraw Materials, LLC, Mayfield Mccraw, and Brenda Mccraw v. Divlend Equipment Leasing, L.L.C, No. 07-12-00215-CV (Tex.App. Dist.7 01/28/2013) McCraw asked the appellate court to reverse the summary judgment.

Background

McCraw Materials and DivLend entered into an equipment lease in June of 2008. The lease covered an agricultural spray airplane that was valued at approximately $425,000. The lease was for a five-year term. After McCraw Materials made a down payment of $42,500, monthly payments were to be made throughout the term of the lease but the amount of these monthly payments would vary based on the income McCraw Materials was able to produce from the airplane.

The lease required McCraw Materials to obtain insurance on the airplane. The lease further required that DivLend be named as “Owner/Lessor” of the airplane on the policy. McCraw Materials obtained insurance on the airplane. However, it had itself listed as the loss payee and DivLend listed as a lienholder.

On April 13, 2011, the airplane was destroyed in a crash. The insurance carrier declared the airplane a total loss and issued a check in the amount of $403,750, payable to McCraw Materials, DivLend, and Platinum Bank. DivLend requested McCraw indorse the check over to DivLend, but McCraw refused. Consequently, DivLend filed suit against McCraw in July of 2011. By order of the trial court, the insurance check was placed in the Registry of the Court pending disposition by the trial court.

In December of 2011, DivLend filed a motion for summary judgment. By this motion, DivLend sought an order turning over the insurance check to DivLend, a judgment against McCraw for $425,000, and an award of attorney’s fees. McCraw filed a response to DivLend’s motion. The trial court signed a partial summary judgment that awarded DivLend the insurance payment that was held in the Registry of the Court, and attorney’s fees in the amount of $18,330.50. After the trial court severed DivLend’s remaining claims into a separate cause number, McCraw appealed.

Ambiguity

McCraw’s first issue on appeal contends that the trial court erred in granting summary judgment because the lease agreement is not a valid, enforceable contract because it is ambiguous. Whether a contract is ambiguous is a question of law that is reviewed by an appellate court de novo.  Whe a court construes a written contract, the primary concern of the court is to ascertain the true intentions of the parties as expressed in the instrument. To achieve this objective, courts must consider the entire writing with the goal of harmonizing and giving effect to all the provisions of the contract so that none will be rendered meaningless. Courts must give contract terms their plain, ordinary, and generally accepted meanings unless the contract itself shows them to be used in a technical or different sense.

Contract Terms

In the present case, the provision of the lease agreement that addresses entitlement to insurance payments provides that, “[t]he proceeds of such insurance payable as a result of loss or damage to any item of the Equipment shall be applied to satisfy Lessee’s obligations as set forth in Paragraph 5 above, and Paragraph 9 below.” Paragraph 5 of the lease agreement identifies rent and other rent-related obligations under the lease. Paragraph 9 of the lease agreement identifies the terms of McCraw’s option to purchase equipment covered by the lease. Undisputed evidence was presented to the trial court that, as of July 25, 2011, the remaining rent-related obligations under the lease were $386,060. Further, undisputed evidence was presented to the trial court that, as of February of 2011, exercise of the option to purchase would be $363,532.71, which appears to reflect payoff of the remaining rent related obligations under the lease plus a $42,500 purchase option.

The lease provided that insurance payable as a result of loss of the airplane shall be applied to satisfy McCraw’s remaining rent-related obligations under the lease, which undisputed evidence established to be at least $386,060, and the cost of McCraw’s exercise of the option to purchase, which undisputed evidence established to be at least $42,500. As such, the undisputed evidence establishes that DivLend was entitled to at least $428,560.

Decision

The Texas appellate court concluded that the lease agreement was not ambiguous. Further, the lease agreement as a matter of law and the undisputed evidence of the minimum amount due under the lease agreement, the trial court did not err in awarding DivLend the $403,750 insurance payment that had been held in the Registry of the Court.

McCraw challenged the trial court’s ability to grant summary judgment in favor of DivLend. Specifically, McCraw contended that they did not materially breach the lease agreement, and DivLend’s claims of money had and received and fraudulent inducement do not support summary judgment. Because the appellate court determined that the trial court did not err in granting summary judgment in favor of DivLend under the unambiguous terms of the lease agreement, it had no reason to address the additional grounds charged by McCraw.

ZALMA OPINION

Insurance is a contract of personal indemnity. The lease agreement in this case required the lessee, McCraw, to name the lessor, DivLend, as the owner/lessor and insured. It failed to do so and then had the unmitigated gall to refuse to allow the lessor to receive the benefits of the insurance contract it promised to buy for it.

This was an easy decision for the court but should have been avoided by DivLend before the plane crashed by reviewing the policy as issued and then insisting that it be changed to what was required by the lease. Both parties, by their sloth, brought about an unnecessary lawsuit and appeal.

© 2013 – Barry Zalma

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

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

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

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

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Life Insurance Investment Fraud Fails

Long Sentence Affirmed

Christian M. Allmendinger appealed his conviction and sentence for several crimes relating to an investment scheme that resulted in nearly $100 million dollars in losses for investors. In United States of America v. Christian M. Allmendinger, No. 11-5162 (4th Cir. 01/23/2013) he asked the Fourth Circuit to reverse his conviction.

FACTS

Allmendinger built a business permeated by fraud in which the principals, instead of paying the premiums immediately or putting the money in escrow, placed them in an account that they used as their own piggy bank. Of course, the very reason that the principals lied about this system is that if the investors knew the truth, they would know that the premiums would actually be paid only if the money was available when the premiums became due and the fraudsters handling the money decided to use it to pay the premiums. Not only was it reasonably foreseeable that the premiums might never be paid under this system, but hiding this potentiality was the whole point of the co-conspirators’ lies that they were prepaying the premiums.

In January 2010, Allmendinger was interviewed by federal prosecutors and law enforcement agents and informed that he would be indicted based on his involvement with A&O. In the following weeks, Allmendinger began to hide his assets. His father opened a bank account in February 2010, and more than $676,000 in funds that Allmendinger had previously held with his father in a joint account was deposited into the new account. His father then used some of those funds to pay more than $300,000 of Allmendinger’s credit card debt.

At the close of the government’s case, Allmendinger moved for a judgment of acquittal on all counts. During the hearing on that motion, the district court observed that no evidence of Allmendinger’s involvement in the A&O scheme after August 31, 2007, had been presented. In light of that fact, notwithstanding that the court had denied Allmendinger’s pre-trial motion to strike, the government suggested striking the indictment language concerning post-sale events and the sham nature of the sale of A&O. Allmendinger maintained that PCI’s fraud was not foreseeable and that he should not be held responsible for the losses attributable to the bond fraud.  The court overruled Allmendinger’s objections and determined the loss amount to be $93,920,635.46, which reflected the total amount lost by the 825 investors during the entire scheme less the amount that had been recovered in the related A&O bankruptcy as of the date of the sentencing.

As the trial court noted, Allmendinger lied about “the structure and size and soundness of the company, the extent of its reach, and the kind of activities in which it engaged, the kind of success it had had, the yields that it had had,” and lied when he claimed that investors’ money would be placed in escrow or would be used to prepay the policy premiums. The court found that even as Allmendinger sold his share, “he knew that Abdulwahab at least was going to continue in the business even though he didn’t know Abdulwahab was going to end up being one of the owners.”  The court concluded that “when you are operating a business that is based on fraud, you are charged with the knowledge that you potentially put at risk everybody’s money that you’ve got and you’ve stolen and inveigled them to part with.”  The court further found that it was reasonably foreseeable to Allmendinger that those continuing the business “were going to engage in exactly the same kind of conduct.”

Because the court determined that the loss from the conspiracy exceeded $50 million, the court applied a 24-level increase to Allmendinger’s base level under the Sentencing Guidelines. In this case, the government, by limiting its case to events occurring while Allmendinger was an owner of A&O, simply proved a more narrow conspiracy than was charged in the superseding indictment. By limiting its case to events occurring while Allmendinger was an owner of A&O, the government proved a conspiracy that was shorter in duration (and therefore caused fewer losses to investors) than the charged conspiracy. The conspiracy proven by the government nonetheless shared the same purpose as the charged conspiracy and was premised on the same fraudulent representations alleged in the indictment. Since the charges were narrowed rather than broadened, Allmendinger’s constitutional rights were not abridged.

A defendant charged with participating in a conspiracy can be held accountable only for the reasonably foreseeable acts of others that are taken in pursuit of the criminal activity he agreed to join. The court found that the scheme and artifice to defraud “was to make abundant misrepresentations to people to secure their money, to use, as he saw fit, in his company.” The court found that Allmendinger agreed with his co-conspirators to lie in a variety of ways, including about the structure and size and soundness of the company, the extent of its reach, and the kind of activities in which it engaged, the kind of success it had had, the yields that it had had, and Allmendinger agreed to perpetuate these lies by written communications in documents that were distributed with his auspices and approvals, as well as by emails and other electronic communications, and to structure it in such a way that he could treat the money in A&O as his personal piggy bank.

The co-conspirators in this case were all eventually convicted, and they received a wide range of sentences: Abdulwahab, 60 years; Oncale, 10 years; Mackert, 188 months; and White, five years. As for the two co-conspirators most similarly situated to Allmendinger, Allmendinger received a sentence shorter than Abdulwahab’s but much longer than Oncale’s.

Allmendinger’s crimes involved frauds of unthinkable scope that financially devastated hundreds of people. Indeed, victim impact testimony established the crushing effect that the conspiracy had on many people’s lives. There is certainly precedent for imposing a comparably stiff sentence for a fraudulent scheme of this magnitude.

ZALMA OPINION

“Chutzpah” is a Yiddish word meaning unmitigated gall. It is best expressed by the plea of a person of murdering his parents who asks the court for mercy because he is an orphan.

Allmendinger, after living the life of Riley on the money he defrauded from innocent investors, had the Chutzpah to argue that his sentence was too severe because he sold out his interest in the fraud while his ex-partners continued to defraud for more. The court, correctly found, that a person who defrauds innocents of over $93 million deserves the most serious sentence a court could impose.

This case also teaches that investors should be wary of life insurance investments based on the early death of those insured. Modern medicine is keeping people alive much longer than expected, the payment of the premium can exceed the profit to be made when the insured finally dies and, as always, if it appears too good to be true, it probably is.

© 2013 – Barry Zalma

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

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

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

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

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Mental Gymnastics Not Allowed to Find Ambiguity

Rhode Island Refuses to Stretch the Imagination to Read Ambiguity Where None Exists

The Supreme Court if Rhode Island was asked to resolve a dispute between Jessica Ahlquist (Ahlquist or defendant) and her insurer Allstate Insurance Company (Allstate or plaintiff). Ahlquit argued that the trial justice erred in ruling that an insurance policy issued to Cheryl Crook (Cheryl) – the mother of the underinsured tortfeasor – did not cover the injuries she sustained when she was struck from behind by a vehicle operated by Cheryl’s son, Jared Crook (Jared). In Allstate Insurance Company v. Jessica Ahlquist., No. 2012-16-Appeal. (R.I. 01/25/2013) Ahlquist further contended that the trial justice erred in holding that an exclusion contained in the Allstate policy applied to this case.

The trial justice, having determined that defendant failed to produce evidence demonstrating a material question of fact on either issue, granted summary judgment in favor of Allstate.  Ahlquist appealed.

FACTS

On June 1, 2008, Jared was driving a 2006 Cadillac CST – which was leased for him by his father, Calvin Crook (Calvin) – when he collided with Ahlquist’s vehicle at the intersection of Harris Avenue and Atwells Avenue in Providence, Rhode Island. As a result of that accident, Ahlquist’s car was seriously damaged and she sustained severe personal injuries.

The Cadillac was insured by Calvin through a policy issued by Allstate. That policy had a $100,000 per person and $300,000 per occurrence liability limit. After Allstate paid the policy limits, Ahlquist sought to recover additional compensation through another Allstate insurance policy issued to Cheryl, Calvin’s former wife. It is this policy that is in dispute in this case. The policy was issued for Cheryl’s vehicle, a Ford Escape; Cheryl was the named insured, and she and Calvin were covered drivers. Under the policy’s “Driver(s) Excluded” category, “[n]one” was listed. However, the policy also provided that a non-owned automobile would be insured if it was used by the policyholder or a resident relative with the owner’s permission, but it further provided that the automobile “must not be available or furnished for the regular use of an insured person.”

The Litigation

Allstate filed an action seeking a declaratory judgment that Cheryl’s insurance policy did not apply to the accident. Allstate moved for summary judgment, arguing that, under the unambiguous terms of the policy, Jared’s operation of the Cadillac was not covered by the policy because the Cadillac was furnished for his regular use. The defendant filed a cross-motion for summary judgment, countering that Cheryl’s policy covered the accident because Jared, who resided with his mother, was not excluded as a driver under the policy and that, therefore, the policy provisions were ambiguous and the ambiguity should be resolved in her favor. The defendant further argued that Calvin was negligent in leasing the vehicle for Jared’s use and that because Calvin was a named driver under the policy, there should be coverage. Finally, defendant asserted that the exclusion was contrary to public policy and that Allstate should not benefit because, according to defendant, Allstate’s agent improperly wrote the insurance policies for Calvin and Cheryl.

Trial Court Decision

The trial justice stated that the following facts were undisputed:

1.    Cheryl did not own the Cadillac driven by Jared;
2.    Jared was a resident relative of Cheryl’s;
3.    Jared was insured to drive the Cadillac; and
4.    the Cadillac was available to Jared and furnished for his regular use.

In light of these undisputed facts, the trial justice was satisfied that the exclusion applied and that the accident in which Ahlquist was injured and the claims arising from it were not covered by Cheryl’s insurance policy. The trial justice also found that the non- owned vehicle exclusion did not conflict with the declaration that there were no excluded drivers under Cheryl’s policy. Finally, the trial justice held that the exclusion did not violate public policy. Accordingly, the trial justice granted summary judgment in Allstate’s favor and denied defendant’s motion for summary judgment.

The Supreme Court

It is well settled that, when examining an insurance policy, courts must apply the rules for construction of contracts. In Rhode Island the court’s analysis is limited to the four corners of the policy, viewing it in its entirety, affording its terms their plain, ordinary and usual meaning. Furthermore, the court must refrain from engaging in mental gymnastics or from stretching the imagination to read ambiguity into a policy where none is present. The test to be applied is not what the insurer intended but what the ordinary reader and purchaser would have understood the language to mean.

The terms of Cheryl’s policy provide that a non-owned automobile will be covered if it was used by the policyholder or a resident relative with the owner’s permission, but it also provides that the automobile “must not be available or furnished for the regular use of an insured person.” Jared’s use of the Cadillac clearly falls within this exclusion: as a “resident-relative,” Jared is considered an insured person per the definition under the policy; however, he used the vehicle on a regular basis. The policy language excluding vehicles furnished for the regular use of an insured person applied. The exclusion does not, as defendant contends, conflict with the declarations page of the policy, which declares that there are no specific drivers excluded under the policy. It is the vehicle that is excluded, not the driver.

Having examined the policy in its entirety, and applying the plain and ordinary meaning of the policy language, the Supreme Court concluded that the exclusion provision is not ambiguous. Defendant’s construction of the policy perceives an ambiguity in the provision where none exists and it, therefore, affirmed the decision of the trial court.

ZALMA OPINON

Lawyers, seeking more money for their clients, continue to attempt to create an ambiguity in an insurance policy where none exits hoping that the severity of the plaintiffs’ injury will convince the court to help the poor injured person and find an ambiguity to cause the insurer to pay whether it owes or not.

Insurance is not an eleemosynary organization. Charity has nothing to do with a profit making business. Charity has nothing to do with the interpretation of contracts. Insurance contracts must be read in their entirety and courts must interpret the contract of insurance based on its terms not on the need of one party or another.

© 2013 – Barry Zalma

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

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

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

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

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Failure to Appear For EUO — Prejudice Required

Prejudice Requirement – An Invitation to Commit Fraud

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

The Supreme Court of the state of Washington fell into the trap that Justice Kaus  pointed out in White when it was required to examine an insured’s duty to cooperate with an insurer’s claim investigation. The petitioner, John Staples, had his insurance claim denied for failure to cooperate-namely, failure to submit to an examination under oath (EUO). In John Staples v. Allstate Insurance Company, No. 86413-6 (Wash. 01/24/2013), Staples sued his insurer for bad faith and related causes of action. The trial court dismissed the case on summary judgment and Staples appealed.

FACTS

On or around August 18, 2008, a 1992 Ford Econoline van belonging to John Staples was stolen from a parking lot in Redmond, Washington. In the back of the van, Staples had stored a large collection of tools. Staples reported the theft to the police, telling them the tools were worth around $15,000. The police report says, “Staples told me that it would cost $15,000 to replace the tools and equipment stored in the van.” The report describes the van as a “work truck” and says that it was a “mobile workshop for the business that Staples contracted with.”

Two weeks later, Staples submitted a claim for loss of the tools to Allstate under his homeowner’s policy. He told Allstate that the tools were worth between $20,000 and $25,000 and that they were for his personal use (although they “could be used” for work).

Based on these apparently inconsistent statements, Allstate transferred Staples’ claim to its special investigation unit. Allstate requested documents from Staples, including proof of ownership, a sworn statement in proof of loss, an authorization to release information, and three years of tax returns. Allstate took two recorded statements from Staples, neither of which was under oath (despite Staples’ claims that he believed they were).

Over the next few months, Staples failed to provide the requested documentation despite several written requests from Allstate. It was not until December 11, 2008, nearly three months after the loss, that Staples submitted his sworn statement in proof of loss and authorization to release information.

On January 15, 2009, Allstate requested by letter that Staples appear for an EUO on January 29, also requesting documentation related to the loss by the following day, January 16. This gave Staples only one day to produce the requested documents. The letter said, “If there are legitimate reasons which make attendance [at the EUO] on this day impossible, please advise immediately so that the examination can be rescheduled if appropriate.”     On January 23, Allstate sent a letter to Staples stating that his EUO was canceled because he had not produced the requested documentation. The letter also said, “If the materials are provided, we will contact you to reschedule the exam.”

This suggests Allstate would only reschedule the exam once the documents were produced, although the record is unclear on this point. The letter was mailed on the same day as a letter from James Sullivan, an attorney Staples had recently hired, who informed Allstate that Staples could not attend an EUO on January 29.

Upon receiving Staples’ letter, Allstate requested that Staples contact Allstate to reschedule the EUO, also reiterating its request for documentation. This time, Allstate did not indicate that it would only reschedule the EUO after Staples produced the requested documents. The record is unclear whether this was in fact a condition that Staples would need to meet before he would be permitted to reschedule his EUO.

Staples hired attorney Daniel Fjelstad, who immediately began accusing Allstate of delay and of violating the Insurance Fair Conduct Act (IFCA). Allstate responded by reiterating its request for Staples to provide documentation and reschedule the EUO.

Staples did neither, instead accusing Allstate of making “burdensome” and “vexatious” requests constituting “harassment.” Staples demanded a justification for Allstate’s documentation request, and Allstate responded that the records were necessary to evaluate whether Staples had filed a false claim.

When Staples did not attempt to reschedule, Allstate denied his claim on April 30, 2009.The parties dispute whether Staples provided the documents Allstate requested, but it appears Staples provided many of the documents substantiating the value of his stolen tools.

Three and a half months after Allstate denied his claim, Staples’ attorney wrote a letter to Allstate saying that Staples was “willing to appear at an EUO” if Allstate would agree to extend the contractual time limit for filing suit (which was about to expire). Allstate responded that it was “unwilling to extend the one year suit limitation . . . .”

On August 24, 2009, Staples sued Allstate in King County Superior Court, alleging breach of contract, bad faith, and violation of the IFCA. Three months later, Allstate moved for summary judgment, seeking to dismiss the claims. Staples opposed the summary judgment motion, but in the alternative asked the court to grant a continuance to allow him to conduct discovery.

ISSUES

(1) Must an insurer’s request for an EUO be reasonable or material to the insurer’s claim investigation?

(2) Did the insured in this case, John Staples, substantially comply with Allstate’s request for an EUO?

(3) Must an insurer show prejudice before denying a claim for failure to submit to an EUO?

Analysis

Most insurance policies contain cooperation clauses requiring the insured to cooperate with the insurer’s handling of claims. Typically, an insured that “substantially and materially” breaches a cooperation clause is contractually barred from bringing suit under the policy if the insurer can show it has been actually prejudiced. The burden of proving non-cooperation is on the insurer.

Cooperation is essential to the insurance relationship because that relationship involves a continuous exchange of information between insurer and insured interspersed with activities that affect the rights of both. The relationship can function only if both sides cooperate.

Staples’ homeowner’s policy with Allstate is a first-party policy containing specific, enumerated cooperation duties including the requirement that Staples submit to an EUO:

3. What You Must Do After A LossIn the event of a loss to any property that may be covered by this policy, you must:d) give us all accounting records, bills, invoices and other vouchers, or certified copies, which we may reasonably request to examine and permit us to make copies. . . . .

Under the policy, Allstate has no duty to provide coverage if Staples does not comply with his duties and Allstate is prejudiced:

We have no duty to provide coverage under this section if you, an insured person, or a representative of either fail to comply with items a) through g) above, and this failure to comply is prejudicial to us.

Failure to comply also precludes Staples from suing Allstate:

12. Action Against Us

No one may bring an action against us in any way related to the existence or amount of coverage, or the amount of loss for which coverage is sought, under a coverage to which Section I Conditions applies, unless:

a) there has been full compliance with all policy terms; and

b) the action is commenced within one year after the inception of loss or damage.

Based on this language, Allstate denied Staples’ claim. The parties dispute whether this decision was correct and whether summary judgment was appropriate. Staples raises three duty to cooperate issues, and we address each in turn.

Issue 1: Must an insurer’s request for an EUO be reasonable/material to the insurer’s claim investigation?

Given the quasi-fiduciary nature of the insurance relationship, the Supreme Court held that if an EUO is not material to the investigation or handling of a claim, an insurer cannot demand it. However, in this case, it appears that Allstate was within its rights to request an EUO. Although it appears an EUO was justified given the discrepancies between the police report and Staples’ insurance claim, we cannot be sure because Allstate never explained what information it was seeking from the EUO that Staples had not already provided. Staples had already given two recorded interviews, produced documents, and signed a broad authorization allowing Allstate to obtain records from other sources.  It is not clear what additional information Allstate hoped to uncover by conducting an EUO.

Issue 2: Did Staples substantially comply with Allstate’s request for an EUO?

Breach of a cooperation clause in Washington state is measured by the yardstick of substantial compliance.

Here, there are unresolved fact issues regarding substantial compliance. Staples does not dispute that no EUO took place. However, he did appear for two scheduled interviews, giving Allstate ample opportunity to examine him. Staples also offered to appear for an EUO if Allstate would extend the deadline for filing suit and signed a broad authorization allowing Allstate access to a wide range of financial documents. These facts on their own do not prove substantial compliance, but at the summary judgment stage they do not need to because we are required to view all facts in a light most favorable to Staples. It is enough that the record demonstrates a genuine question of material fact.

Given this, Allstate should have rescheduled the EUO. But it did not.

Issue 3: Must an insurer demonstrate prejudice before denying a claim for failure to submit to an EUO?

In the first-party insurance context non-cooperation does not absolve an insurer of liability unless the insurer was actually prejudiced. A showing of prejudice is still required by the clear terms of Staples’ policy.

Allstate has not met its summary judgment burden of showing actual prejudice. A claim of actual prejudice requires affirmative proof of an advantage lost or disadvantage suffered as a result of the breach, which has an identifiable detrimental effect on the insurer’s ability to evaluate or present its defenses to coverage or liability. Prejudice is an issue of fact that will seldom be established as a matter of law.  Prejudice will be presumed only in extreme cases.

CONCLUSION

Even though Allstate was within its rights to ask for an EUO, the Supreme Court found that there are fact issues about whether Staples substantially complied with Allstate’s request. Further, the trial court should have required a showing of prejudice, and there are fact issues about whether Allstate in fact suffered prejudice. It may well be that Staples did not substantially comply and that Allstate was sufficiently prejudiced to justify denying Staples’ claim. The Supreme Court concluded that on the record before it material issues of fact preclude summary judgment.

The Dissent:

An insurer suffers prejudice, as a matter of law, when its insured fails to provide it with the financial records it reasonably needs in order to complete an investigation into the question of whether the insured’s claim was fraudulent. The majority holds an insured individual with a questionable claim frustrates the company’s claim investigation for months by refusing to submit to an EUO as required by the insurance policy may still bring suit against the insurance company for denying his claim based on his non-cooperation. “Today’s decision invites insureds to put minimal effort into complying with the terms of their insurance policies, expecting the company to pay.”

ZALMA OPINION

Allstate’s first problem is the wording of its policy when it added “prejudice” to its EUO clause.

The right to an EUO has existed as a condition precedent to indemnity since the first New York Standard Fire Insurance policy was issued in the 19th Century. Adding a requirement to show prejudice for failure is an invitation to those intent on committing fraud to simply spend his time and energy accusing the insurer of wrongful conduct and refuse to appear for EUO until the claim is denied.

Allstate gave the court an opening by refusing to schedule the EUO after the insured agreed to appear after the claim was denied. I have often done so without withdrawing the denial so that the information would be available.  EUO is a tool and should always be used if offered. By refusing to do so it gave the Supreme Court the hook on which to allow the case to go forward and allows future claimants to present fraudulent claims and then avoid the insurer raising a defense by obfuscation.

© 2013 – Barry Zalma

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

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

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

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

 

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Statute Trumps Contract

No Negligence – No Coverage

The Minnesota Supreme Court was asked to determine whether Appellant L.H. Bolduc Company, Inc. (“Bolduc”) is obligated under an insurance policy and an indemnification provision in a construction contract to reimburse respondent Engineering and Construction Innovations, Inc. (“ECI”) for expenses ECI incurred in repairing a damaged sewer pipeline. Bolduc, the subcontractor of ECI, damaged a sewer pipe during the course of a construction project. After ECI repaired the damage, it sought reimbursement from Bolduc’s insurer, The Travelers Indemnity Company of Connecticut (“Travelers”), under an endorsement to Bolduc’s commercial general liability policy naming ECI as an additional insured for liability “caused by acts or omissions” of Bolduc. Travelers denied coverage. ECI then sued Bolduc and Travelers for negligence and breach of contract to recover the costs ECI paid to repair the pipe.

A jury found that Bolduc was not negligent, and awarded ECI zero dollars in damages. Following trial, the district court granted summary judgment in favor of Travelers and Bolduc on ECI’s breach of contract claims, concluding that Travelers and Bolduc had no obligation to reimburse ECI for damages not caused by Bolduc. The court of appeals reversed, determining that ECI was entitled to coverage as an additional insured without regard to Bolduc’s fault. The court of appeals also concluded that Bolduc was required to indemnify ECI, and that the subcontract between ECI and Bolduc did not violate Minn. Stat. § 337.02 (2012), which prohibits indemnification for the fault of others in construction contracts. In Engineering & Construction Innovations, Inc v. L.H. Bolduc Co., Inc, No. A11-0159 (Minn. 01/23/2013) the Supreme Court resolved the dispute.

The Project

The Metropolitan Council Environmental Services (“Met Council”) hired Frontier Pipeline, LLC (“Frontier”) as the general contractor on a construction project involving the installation of an underground sewer pipeline in Hugo. After Frontier installed the pipeline, Frontier subcontracted with ECI to install a lift station and force main access structures at specified locations along the pipeline. An access structure provides access to points where two sections of pipeline meet, and is built to allow sections of the pipe to be connected and to provide manhole access to the pipeline.

The Subcontract

In order to excavate pits to construct the access structures without danger of the walls of the pits collapsing, ECI subcontracted with Bolduc to build “cofferdams,” a shoring system created by driving metal sheeting into the ground to act as walls for the pits during excavation and construction. The sheets are driven separately but eventually interlock to form a rectangle shape, and provide lateral support to the walls of the pit.

In January 2007 ECI and Bolduc entered into a subcontract (the “subcontract”) drafted by ECI, which provided that Bolduc would “[f]urnish, drive, and remove six . . . sheeting cofferdam[s]” over the pipeline at six locations. Under the subcontract, Bolduc was to drive the sheets “per ECI location.”

The subcontract also imposed insurance and indemnification obligations on Bolduc. Bolduc obtained commercial general liability insurance from Travelers, which provided coverage during the time period at issue in the amounts required by the subcontract. Bolduc’s insurance policy specified that Travelers “will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” The policy excluded coverage for bodily injury or property damage based on the insured’s assumption of liability for such damages in a contract.

In December 2007 ECI discovered the damage to the underground pipeline that gave rise to this dispute. At one of the cofferdam locations, one of Bolduc’s metal sheets caused damage because it was driven through the edge of the pipe. All parties involved agree that Bolduc drove a sheet into the pipe, and that contact between the sheet and the pipe caused the resulting damage. At the site of the damage, ECI had provided the template and markings designating where Bolduc was to drive the sheeting cofferdams as required by the subcontract.

Travelers refused to reimburse ECI, claiming that Bolduc was not the cause of the damage, and therefore ECI’s claim did not fall within the coverage provided by the additional insured endorsement.

The Trial

After a 3-day trial, the jury returned a special verdict using a form that had been proposed by Bolduc, and not objected to by ECI. The jury answered two questions. In response to the question “Was [Bolduc] negligent?” the jury answered “No.” The special verdict form also asked “What sum of money will fairly compensate [ECI] for its loss resulting from damage to the pipe?” to which the jury answered “$0.”

Bolduc brought a motion for summary judgment, arguing that the indemnity provision in the subcontract was unenforceable because any obligation to indemnify ECI violated Minn. Stat. § 337.02 (2012). Under Minn. Stat. § 337.02, indemnity of a party to a construction contract other than for liability arising from the promisor’s own wrongful conduct is not enforceable.

The district court granted the motions of Bolduc and Travelers in their entirety, dismissing ECI’s claims with prejudice.

Insurance Coverage

It is well-established that the burden of proof rests upon the party claiming coverage under an insurance policy. In order to recover from Travelers, ECI must show that it is an insured under the policy. The language of the additional insured endorsement at issue provides that ECI is an additional insured under the policy: “Only with respect to liability for “bodily injury”, “property damage” or “personal injury”; and If, and only to the extent that, the injury or damage is caused by acts or omissions of [Bolduc] in the performance of “[its] work” to which the “written contract requiring insurance” applies. [ECI] does not qualify as an additional insured with respect to the independent acts or omissions of [ECI].”

The language of the additional insured provision indicates that ECI’s coverage under the additional insured endorsement cannot be divorced from the concept of fault.

The insurance policy contains a specific exclusion for contractual liability, stating that “[t]his insurance does not apply to . . . ‘[b]odily injury’ or ‘property damage’ for which the insured is obligated to pay damages by reason of the assumption of liability in a contract or agreement.” The exclusion does not apply, however, to contractual agreements under which the insured “assume[s] the tort liability of another party.” Additional insured clauses do not enlarge the insurance coverage as defined in the policy, but merely cause the insurance to cover persons other than the named insured within the limits of the policy coverage.

The Supreme Court concluded that the additional insured endorsement is plainly a vicarious liability provision. Of the three ways in which ECI could become liable for property damage, only one is covered under the additional insured provision and the remainder of the policy. If ECI is directly liable for the property damage, the additional insured provision excludes coverage. If ECI is liable for damage through the assumption of contractual liability for Bolduc’s acts or omissions, coverage is also excluded under other provisions of the policy.

Therefore, the additional insured endorsement, only provides coverage if ECI is vicariously liable for property damage caused by acts or omissions of Bolduc. ECI can only be vicariously liable if Bolduc itself is liable. Because a jury found that Bolduc was not negligent, and that finding has not been appealed, ECI cannot be vicariously liable for Bolduc’s conduct in hitting the pipe, and ECI is not entitled to insurance coverage.

Indemnification

Bolduc argued that under the plain language of the statute, because it was not at fault for the damaged pipe, requiring Bolduc to indemnify ECI in this situation would run afoul of the prohibition in the plain language of section 337.02, an agreement is unenforceable, unless “the underlying injury or damage is attributable to the negligent or otherwise wrongful act or omission, including breach of a specific contractual duty, of the promisor.”

Because Bolduc was not at fault for the pipeline damage, any obligation by Bolduc to indemnify ECI would violate Minn. Stat. § 337.02 unless that obligation was accompanied by a coextensive insurance agreement under Minn. Stat. § 337.05. Having already determined that no insurance coverage is available to ECI under the Travelers’ policy with respect to the pipe damage, any indemnification obligation in the contract is not saved by Minn. Stat. § 337.05, subd. 1, because any such obligation is not, based on the Supreme Court’s conclusion in the first section of its opinion, coextensive with an obligation to insure.

ZALMA OPINION

Risk transfer is a key to the operation of the construction business. Owners transfer the risk of loss to the general contractor, the general contractor transfers risk to the subcontractors by contracts of indemnity and requirements for additional insured endorsements. States like Minnesota have enacted statutes that limit the ability of one to transfer the risk to another.

When entering into such contracts it is imperative that the contracting parties are sure that their contracts comply with the conditions set by state law and read and understand the additional insured provisions of the subcontractor’s policy.

In this case the contractor lost because a jury found it was solely responsible for the injury and that its contract with Bolduc and Travelers did not comply with the state statute.

© 2013 – Barry Zalma

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

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

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

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

 

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Insurance is Not A Government Benefit

Proof Of Fraud Needed to Rescind Insurance in South Carolina

Insurance is a contract of utmost good faith. Every insurer insurance company is entitled to determine for itself what risks it will accept, and therefore to know all facts relative to the applicant’s physical condition. It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. Materiality must be determined solely by the probable and reasonable influence which the admittedly undisclosed information
would have had upon the insurer’s decision to issue the policy. This is a subjective test; the critical question is the effect truthful answers would have had on the insurer, not on some “average reasonable” insurer.

Shenandoah Life Insurance Company brought an action to void an insurance policy it issued on the life of Lorenzo Smallwood.  The circuit court granted partial summary judgment to Shenandoah, and thus narrowed the issue for trial to whether Lorenzo intended to defraud the insurance company when he did not disclose information related to his medical history on the insurance application. At trial, the court granted Shenandoah’s motion for a directed verdict. Lakeisha Smallwood appealed the directed verdict.  In Shenandoah Life Insurance Company v. Lakeisha E. Smallwood, No. 5076 (S.C.App. 01/23/2013) the South Carolina Court of Appeal was asked to determine if there was sufficient evidence to support a directed verdict on fraud.

Facts

Lorenzo Smallwood joined the U.S. Marine Corps following the 9/11 terrorist attacks and served tours of duty in both Afghanistan and Iraq.  He was honorably discharged from the Marines in 2004.  On October 2, 2006, Lorenzo visited the emergency department of William Jennings Bryan Dorn Veteran’s Medical Center in Columbia.  He complained to nurse Pamela O’Toole about not being able to sleep well in the two years since his return from his tours overseas and stated he believed he suffered from post-traumatic stress disorder (PTSD).  O’Toole noted on her medical assessment, “[p]atient admits to drug and alcohol use.”

Later in the afternoon, Lorenzo saw Nirav Pathak, M.D., who recorded in his notes Lorenzo “cannot sleep well,” “feels depressed,” and “thinks that he suffers from PTSD since he came home 2 years ago from Iraq/Afghanistan.”  Dr. Pathak also noted, “alcoholic, 12 pack beer every day.”  In his assessment, Dr. Pathak wrote, “Substance Abuse (Alcohol) – current; Cocaine Abuse – current.”

When Dr. Pathak later testified, he explained that this assessment of Lorenzo “was based upon what [he] had talked to [Lorenzo] about.”  Though neither Dr. Pathak’s notes nor his testimony reveal exactly what Lorenzo told him, Dr. Pathak testified that his notes showed Lorenzo expressed his understanding of the assessment. However, Dr. Pathak could not confirm, nor is it clear from the record, that Lorenzo agreed because, by the time of trial, Dr. Pathak also had no independent recollection of treating Lorenzo.  Dr. Pathak referred Lorenzo for a mental health consultation, which was scheduled for November 24, 2006, but Lorenzo did not show up for the appointment.

A year later, on November 19, 2007, Lakeisha Smallwood sought an insurance policy through Shenandoah on the life of her husband Lorenzo.  She initially consulted Lorenzo’s aunt, Gayle Smallwood, who sold insurance for Shenandoah.

Gayle asked her colleague, Laura Haynes, an independent insurance agent representing Shenandoah, to write the policy.  Haynes met Lorenzo and Lakeisha at their home to fill out the insurance application.  While seated at the kitchen table, Haynes asked Lorenzo the application questions and recorded his answers on the application.  Lakeisha and Gayle were present at the home when the application was being filled out but were primarily in another room with Lorenzo’s and Lakeisha’s children.  Haynes testified she told Lorenzo to answer the application questions truthfully, and that both Lorenzo and Lakeisha had an opportunity to review the application before they signed it.  The application contained a number of questions regarding Lorenzo’s medical history, particularly, “Within the last 10 years, have any persons proposed for coverage been diagnosed or treated by a member of the medical profession for . . . mental or nervous disorder, alcohol or drug dependency? Within the past 5 years, have any persons proposed for coverage . . . [u]sed cocaine?”

Lorenzo answered “No” to each of these questions.  Shenandoah issued the policy.

On September 18, 2008, Lorenzo was shot to death.  The shooter was found guilty of voluntary manslaughter and sentenced to eighteen years.  Shenandoah denied Lakeisha’s claim on the policy on the ground that Lorenzo provided false statements on the application regarding his medical history.

Analysis

While there is certainly a circumstantial inference that [Lorenzo] made the misrepresentations with the intent to defraud the plaintiff, the evidence presented to the court is also susceptible of the inference (at least at this stage) that he made the misrepresentations to hide his alcohol and drug abuse and his mental health issues from his wife.

The trial court granted Shenandoah’s motion for a directed verdict after the close of all evidence.  The trial court stated: “This is another of those rare cases in which the undisputed facts can reasonably give rise to only one inference, namely, that the policy was procured by fraud.”

The court of appeal noted that there was not much evidence in the record of Lorenzo’s intent, as is to be expected in cases where the applicant is deceased.  The intent with which misrepresentations are made on a life insurance application is usually shown by circumstantial evidence, since the direct evidence is “locked up in the heart and consciousness of the applicant.”  The lack of evidence of intent works against the party who bears the burden of proof.

Shenandoah presented evidence from which a jury could reasonably conclude, based on the clear and convincing evidence standard, that Lorenzo made the misrepresentations with the intent to defraud the insurance company.  However, the question we must answer is whether there is evidence in this record from which a jury could reasonably reach the opposite conclusion—that Shenandoah failed to prove by clear and convincing evidence that Lorenzo intended to defraud the insurance company.

There are several plausible explanations for Lorenzo’s failure to disclose the requested information. Ordinarily, the question of fraud in a case of this kind is for the jury.

Shenandoah presented no evidence that Lorenzo, at age twenty-six, associated his alcohol or cocaine use with any increased medical risk.  The medical records from Lorenzo’s visit to Dorn Medical Center reveal that he admitted “drug and alcohol use” to a nurse, and that a doctor assessed it as alcohol and cocaine “abuse.”  However, neither the nurse nor the doctor remembered at trial what Lorenzo said that led them to write what they wrote in the records.  Viewed in the light most favorable to the non-moving party, Dr. Pathak’s used the term “abuse” to refer to isolated cocaine and alcohol use.  As to any mental disorder, the record contains nothing more than Lorenzo’s suspicion he had PTSD.  These facts support a reasonable inference that Lorenzo’s failure to disclose the information was not fraudulent.
The appellate court held that the evidence Shenandoah presented was insufficient to support a conclusion that it proved Lorenzo’s fraudulent intent clearly and convincingly as a matter of law. In South Carolina the burden on Shenandoah was to prove fraud by clear and convincing evidence. Clear and convincing evidence is that degree of proof which will produce in the mind of the trier of facts a firm belief as to the allegations sought to be established.

Sending the case back to the trial court the Court of Appeal assuaged its collective conscience by stating it did not condone Lorenzo’s misrepresentations but found a jury could have reasonably concluded Shenandoah failed to prove Lorenzo made the misrepresentations with the intent to defraud the insurance company and the trial court should not have directed a verdict in favor of Shenandoah.

ZALMA OPINION

The South Carolina court seems to have forgotten the maxim that insurance is a contract of utmost good faith where neither party will do anything that will deprive the other of the benefits of the contract. A person who drinks a twelve pack of beer daily and imbibes in banned substances might just get drunk enough to place himself in the type of situation where he would be, as Lorenzo was, shot to death. In addition, such abuse clearly increased the chance of an early death.

When an insured lies on an application for insurance with knowledge of the lie and with the intent to deceive the insurer, he is committing fraud. That he may have had other reasons than defrauding the insurer to lie the fact of the lie was obvious. The insurer was deceived. Had it known the true facts it would never have insured Lorenzo.

A requirement that an insurer prove actual fraud before it rescinds a policy of insurance is making insurance a benefit akin to a government entitlement than a contract of insurance. In California and other states that follow the ancient Marine Rule a contract of insurance may be rescinded if the insured misrepresents or conceals material facts, whether done intentionally or innocently, since the insurer is deceived and to allow the contract to continue would be unfair.

© 2013 – Barry Zalma

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

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

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

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

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Clear and Unambiguous Exclusion Must be Enforced

Insurer Meets Burden of Proof

The Washington Court of Appeal was asked to resolve an insurance coverage dispute that arose from a lawsuit that alleged that the insureds were liable for injuries caused by the unlawful transmission of text messages in Oregon Mutual Insurance Company v. Rain City Pizza, L.L.C., A Washington Limited Liability Company, No. 67471-4-I (Wash.App.Div.1 01/14/2013).

Facts

Seattle PJ Pizza, L.L.C. is a Washington company that operates 21 Papa John’s pizza stores in the Seattle and Peninsula areas of Washington State and is owned by Kevin Sonneborn and Edward Taliaferro. In March and April of 2010, Sonneborn gave a third party marketing company, On Time 4 U, L.L.C., certain lists of Seattle PJ Pizza’s customers. Sonneborn compiled call lists of the names and telephone numbers of individuals who had ordered pizza from the Papa John’s stores operated by Seattle PJ Pizza. Some of this information came from records of telephone orders and other information came from computer records of orders that were placed online. On Time 4 U used these call lists to send text messages to customers on behalf of Seattle PJ Pizza, advertising Papa John’s stores operated by Seattle PJ Pizza.

In May 2010, a class action lawsuit was filed in King County Superior against Sonneborn and Taliaferro, alleging violations of federal and state laws by the unlawful transmission of text messages to advertise pizza products.

The complaint alleged five counts against the defendants:

  1. violations of the Telephone Consumer Protection Act, 47 U.S.C. § 227;
  2. violations of RCW 19.190.060 (prohibiting unsolicited commercial text messages);
  3. violations of RCW 80.36.400 (prohibiting use of automatic dialing and announcing devices for commercial solicitation);
  4. violations of Washington’s Consumer Protection Act, chapter 19.86 RCW; and
  5. negligence by permitting the sending of the messages.

The Complaint for Declaratory Relief

Oregon Mutual Insurance Company (Oregon Mutual) brought an action in King County Superior Court seeking a declaratory judgment that it had no duty to defend its insureds, the defendants in this lawsuit. Oregon Mutual claimed that coverage was barred by the policy’s exclusion for claims arising out of the distribution of information in violation of any statute that prohibits the distribution of material or information. Oregon Mutual further contended that the claims alleged against the defendants did not fall within the policy’s liability coverage for claims of “personal and advertising injury” and “property damage” because the complaint alleged neither a privacy violation nor an injury caused by an “occurrence” as defined by the policy.

The trial court denied Oregon Mutual’s claim on summary judgment, agreeing with the defendants that the exclusion does not apply because it covers only acts or omissions of the defendants and there were no allegations that the defendants (other than Seattle PJ Pizza and Sonneborn) participated in the text messaging campaign. The court further concluded that the complaint alleged personal and advertising injuries and injuries caused by an “occurrence” that were covered by the policy. Oregon Mutual appealed.

Analysis

In disputes over coverage or the duty to defend, the insured bears the burden of proving that coverage or a defense obligation exists, while the insurer bears the burden of proving that an exclusion applies. Insurance policies must be liberally construed in favor of coverage.  Exclusions are strictly construed against the insurer.

Oregon Mutual contended that coverage was precluded by the policy exclusion for claims alleging damages arising from the unlawful distribution of materials.

The policy contains the following exclusion for Business Liability Coverage:

This insurance does not apply to: ….

s. Distribution Of Material In Violation Of Statutes

“Bodily injury,” “property damage,” or “personal and advertising injury” arising directly or indirectly out of any act or omission that violates or is alleged to violate:

(1) The Telephone Consumer Protection Act (TCPA), including any amendment of or addition to such law; or

(2) The CAN-SPAM Act of 2003, including any amendment of or addition to such law; or

(3) Any statute, ordinance or regulation, other than the TCPA or CAN-SPAM Act of 2003, that prohibits or limits the sending, transmitting, communicating or distribution of material or information.

The defendants noted that there is no allegation that any of the defendants committed the acts; rather, the complaint only alleges that Sonneborn and On Time 4 U committed the acts. The defendants argue in the alternative that the language is ambiguous about to whose acts or omissions the exclusion applies and must therefore be construed in favor of coverage. Oregon Mutual countered that the policy language is unambiguous as it clearly states that it applies to “any” act or omission, not just those of the defendants.

The Court of Appeal concluded that the policy language states “any” act or omission and therefore does not limit the acts to those of a particular actor; rather, it applies to any acts that violate the statutes, which would include those committed by someone other than the insured. The additional language barring coverage for injuries “arising directly or indirectly out of any act or omission” is consistent with this interpretation as it contemplates the situation where the insured may be responsible for an act or omission committed by another, such as negligent supervision or vicarious liability, which is what is alleged against the defendants here.

At the very least the claims alleged injuries arising indirectly from the violation of statutes prohibiting the transmission of information – the complaint alleges that the defendants were responsible for the injuries caused by the text messages because they negligently allowed them to be sent and/or were vicariously liable for their transmission. Therefore, the Court of Appeal concluded, the claims are precisely those to which the exclusion applies and that the trial court therefore erred by denying Oregon Mutual’s motion for summary judgment.

ZALMA OPINION

Insurance policies can, contrary to the opinion of many plaintiffs’ lawyers, be written in clear an unambiguous language. The words: “any act or omission” could not be more clear. “Any” includes every and eliminates none.

The Washington state court had the courage to reverse the trial court and find that the acts or omissions alleged in the lawsuit were “any act or omission” that violated the laws specified in the contract of insurance. More insurers should work to write their exclusions as clearly and without ambiguity as did Oregon Mutual.

© 2013 – Barry Zalma

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

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

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

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

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Non-Trucking Use Coverage

Limited Coverage for Trucker Enforced

The Wisconsin Court of Appeal was asked to resolve an insurance coverage dispute arising out of a multi-vehicle accident that took place on February 27, 2009 in Brian Casey v. Ronald Smith, John Zeverino, Taylor Truck Line, Inc, No. 2012AP667 (Wis.App. 01/15/2013).

One of the vehicles involved was a semi-tractor owned and operated by John Zeverino, but leased to Taylor Truck Line, Inc. Taylor had a commercial automobile policy through Great West Casualty Company, and Zeverino had a non-trucking use automobile policy through Acceptance Casualty Insurance Company. The circuit court determined the Acceptance policy provided coverage for claims stemming from the accident, and the Great West policy did not, because Zeverino was not acting “in the business of” Taylor at the time of the accident.

BACKGROUND

On October 10, 2006, Zeverino leased a Freightliner semi-tractor he owned to Taylor, pursuant to an “Independent Contractor Equipment Lease Agreement.” The agreement provided that Zeverino would use the tractor “to transport, load and unload on behalf of [Taylor] … such traffic as [Taylor] may from time to time make available to [Zeverino.]” The agreement further specified that Taylor would have “exclusive possession, control and use” of the tractor and would “assume complete responsibility to the public for the operation of [the tractor]” during the term of the lease. It also provided that Zeverino would be responsible for “[m]aintaining the [tractor] in the state of repair required by all regulations” and would bear all repair and maintenance expenses.

In addition, Taylor and Zeverino each agreed to maintain certain insurance, which was to provide coverage for the tractor depending on how it was being used. Taylor agreed “to provide and maintain insurance coverage for the protection of the public from damage to persons and property[.]” However, Taylor’s insurance would be in effect only when the tractor was “being operated in the exclusive service of [Taylor] and while actually engaged in transportation for [Taylor.]” Zeverino, in turn, agreed to “indemnify and hold [Taylor] harmless from all claims relating to [Zeverino’s] bobtailing of the equipment[.]”

In trucking industry parlance, “bobtailing” means driving a tractor without an attached trailer. Zeverino also agreed to carry “so-called bobtail liability insurance coverage with respect to public liability or property damage … as concerns all equipment hereunder when not used in performance of a trip under this agreement.” Bobtail insurance is another name for non-trucking use insurance, which generally covers a tractor when it is not being used for trucking purposes.

In January 2009, Zeverino drove the tractor to FABCO, a Caterpillar dealership in Eau Claire, Wisconsin, to have its electronic control module adjusted. While performing the adjustment, FABCO damaged the tractor’s grille. FABCO ordered a new grille, and called Zeverino when it arrived. Instead of making an appointment to replace the grille, FABCO instructed Zeverino to stop by whenever it was convenient. In addition, Zeverino had previously ordered a new oil filler tube for the tractor after the existing tube broke off at the engine block. FABCO offered to install the new tube at the same time it replaced the grille.

On February 27, 2009, Zeverino had the day off work. He set out from his home and began driving his tractor to FABCO to have the grille replaced. He planned to return home after FABCO completed the work. No one from Taylor knew that he was going to FABCO, and he was not doing so pursuant to any orders or instructions from Taylor. He did not consider himself to be acting “in the business of Taylor” at the time, and he was not pulling a trailer or any other freight. However, while driving to FABCO, Zeverino’s daily driver’s log reflected that he was “driving,” rather than “off duty.”

At his deposition, Zeverino testified he “needed to get [the grille] repaired” because it was “already starting to fall apart and fall off on the highway.” He stated the repairs were necessary for the tractor to operate “the way [he] needed it to … as an owner, operator for [Taylor.]” However, he conceded the broken grille and oil filler tube did not prevent him from hauling loads on Taylor’s behalf. He also admitted the tractor was never placed out of service because of these defects.

On the way to FABCO, Zeverino was involved in an accident with three other vehicles, including one driven by Brian Casey. At the accident scene, a Wisconsin state trooper conducted a “Level I” inspection of Zeverino’s tractor, the most comprehensive type of post-accident inspection, and completed a “Driver/Vehicle Examination Report.” The report noted that no violations were discovered during the inspection of the tractor. The trooper crossed off the portion of the form requiring certification that “all Out of Service defects … have been repaired and the vehicle has been restored to safe operating condition.”

At the accident scene, Zeverino logged himself as “on duty (not driving)” on his driver’s daily log. Following the accident, he drove the tractor to FABCO, where the grille and oil filler tube were replaced as planned. Casey subsequently sued Zeverino and several other defendants, asserting personal injury claims.

A dispute arose between Great West and Acceptance as to which of their policies covered Casey’s claims. Both insurers agreed that one, but not both, of their policies afforded coverage. They also agreed that resolution of the coverage issue turned on whether Zeverino was operating the tractor “in the business of” Taylor at the time of the accident. If so, Great West’s commercial automobile policy provided coverage; if not, there was coverage under Acceptance’s non-trucking use policy.

DISCUSSION

The court’s goal in interpreting an insurance policy is to give effect to the parties’ intent. If the policy language is unambiguous it is simply enforced as written.

The Acceptance Policy

Acceptance does not dispute that the non-trucking use policy it issued to Zeverino makes an initial grant of coverage for Casey’s claims. However, Acceptance argues the policy’s exclusions apply. Acceptance first contends Exclusion 14(b) precludes coverage for Casey’s claims. Exclusion 14(b) states that the insurance provided by the policy does not apply to “a covered ‘auto’ … [w]hile used in the business of anyone to whom the ‘auto’ is rented[.]” It is undisputed that Zeverino’s tractor constitutes a “covered ‘auto'” under the policy and that the tractor was rented to Taylor. Thus, the dispositive issue is whether the tractor was being used “in the business of” Taylor at the time of the accident.

If the owner/operator could have continued hauling loads for the lessee without obtaining the repairs, then the repairs did not further the lessee’s commercial interests. The facts in this case establish that the repairs to the tractor’s grille and oil filler tube were not necessary for Zeverino to continue operating the tractor in Taylor’s business. He admitted these defects did not prevent him from hauling loads on Taylor’s behalf. He conceded the tractor was never taken out of service because of the broken grille and oil filler tube. These facts establish that Zeverino could have continued operating his tractor in Taylor’s business without first repairing the grille and oil filler tube. Consequently, the repairs did not further Taylor’s commercial interests, and Zeverino was not acting “in the business of” Taylor at the time of the accident.

The Great West Policy

In addition to determining that Casey’s claims were covered under the Acceptance policy, the trial court also concluded the Great West policy did not provide coverage.

Since the appellate court had already determined that Zeverino was not acting in the business of Taylor when the accident occurred he was not an insured under the Great West policy, and the policy does not make an initial grant of coverage for Casey’s claims. As a result, those claims are not covered under the Great West policy.

ZALMA OPINION

This case is evidence that insurance companies must be careful when suing another insurance company. The undisputed facts of this case should have been clear to Acceptance that its policy applied and there were no facts that indicated that Great West provided coverage for the accident. The money to litigate the issue would have been better spent by providing the driver with a vigorous and effective defense to the suit by Casey.

Bad facts always makes bad law. This could have been resolved by the two insurers had they done a thorough investigation before starting the coverage suit.

© 2013 – Barry Zalma

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

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

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

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

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Copyright Not Given Up by Performance

Happy Birthday Martin Luther King, Jr.

When I was a 21-year-old young man I was moved by the “I Have a Dream” speech as were almost every person in the United States. I can only wish more people today agreed with Dr. King. On this holiday celebrating his birth, I move from my typical insurance law summaries to talk about a case dealing with the “I Have a Dream” speech that worked to protect Dr. King’s estate’s right to the speech.

The Estate of Martin Luther King, Jr., Inc. brought a copyright infringement action against CBS, Inc. after CBS produced a video documentary that used, without authorization, portions of civil rights leader Dr. Martin Luther King’s famous “I Have a Dream” speech at the March on Washington on August 28, 1963. The district court granted summary judgment to CBS on the ground that Dr. King had engaged in a general publication of the speech, placing it into the public domain. In Estate of Martin Luther King, Jr., Inc. v. CBS, Inc., 194 F.3d 1211, 52 U.S.P.Q.2d 1656 (11th Cir. 11/05/1999), the 11th Circuit Court of Appeal resolved the dispute with one concurring justice arguing that there was no publication but just a performance.

FACTS

The facts underlying this case form part of our national heritage and are well-known to many Americans. On the afternoon of August 28, 1963, the Southern Christian Leadership Conference (“SCLC”) held the March on Washington (“March”) to promote the growing civil rights movement. The events of the day were seen and heard by some 200,000 people gathered at the March, and were broadcast live via radio and television to a nationwide audience of millions of viewers. The highlight of the March was a rousing speech that Dr. Martin Luther King, Jr., the SCLC’s founder and president, gave in front of the Lincoln Memorial (“Speech”). The Speech contained the famous utterance, “I have a dream …,” which became symbolic of the civil rights movement. The SCLC had sought out wide press coverage of the March and the Speech, and these efforts were successful; the Speech was reported in daily newspapers across the country, was broadcast live on radio and television, and was extensively covered on television and radio subsequent to the live broadcast.

On September 30, 1963, approximately one month after the delivery of the Speech, Dr. King took steps to secure federal copyright protection for the Speech under the Copyright Act of 1909, and a certificate of registration of his claim to copyright was issued by the Copyright Office on October 2, 1963. Almost immediately thereafter, Dr. King filed suit in the Southern District of New York to enjoin the unauthorized sale of recordings of the Speech and won a preliminary injunction on December 13, 1963.

For the next twenty years, Dr. King and the Estate enjoyed copyright protection in the Speech and licensed it for a variety of uses, and renewed the copyright when necessary. In 1994, CBS entered into a contract with the Arts & Entertainment Network to produce a historical documentary series entitled “The 20th Century with Mike Wallace.” One segment was devoted to “Martin Luther King, Jr. and The March on Washington.” That episode contained material filmed by CBS during the March and extensive footage of the Speech (amounting to about 60% of its total content). CBS, however, did not seek the Estate’s permission to use the Speech in this manner and refused to pay royalties to the Estate.

DISCUSSION

Under the regime created by the 1909 Act, an author received state common law protection automatically at the time of creation of a work. This state common law protection persisted until the moment of a general publication. When a general publication occurred, the author either forfeited his work to the public domain or, if he had complied with federal statutory requirements beforehand, converted his common law copyright into a federal statutory copyright. In order to soften the hardship of the rule that publication destroys common law rights, courts developed a distinction between a “general publication” and a “limited publication.” Only a general publication divested a common law copyright.  A general publication occurs when a work was made available to members of the public at large without regard to their identity or what they intended to do with the work. A non-divesting limited publication was one that communicated the contents of a work to a select group and for a limited purpose, and without the right of diffusion, reproduction, distribution or sale.

It appears from the case law that a general publication occurs only in two situations. A general publication occurs if tangible copies of the work are distributed to the general public in such a manner as allows the public to exercise dominion and control over the work.  Even if a performance were regarded as a copy of the work being performed, the act of publication would not occur merely by virtue of viewing the performance since an audience does not thereby gain such dominion over the copy as to warrant the Conclusion that the work has been surrendered to the public.

A general publication may occur if the work is exhibited or displayed in such a manner as to permit unrestricted copying by the general public.

The case law indicates that distribution to the news media, as opposed to the general public, for the purpose of enabling the reporting of a contemporary newsworthy event, is only a limited publication. The Eleventh Circuit believed that the authority granted to the press in the instant case-extensive news coverage including live broadcasts-is analogous to a case where authority was granted to the host of an educational television program to broadcast on television. In this  case, authority was granted to the press for extensive news coverage, also including broadcasts on television. In both cases, the authority was granted to a limited group for a limited purpose.

At trial, CBS may well produce evidence that brings its republication of the speech outside copyright protection. The Eleventh Circuit concluded CBS did not do so at summary judgment, reversed the trial court and concluded there existed genuine issues of material fact as to whether a general publication occurred.

One justice argued that there was no publication, general or limited,  because Dr. King’s delivery of his “I Have A Dream” speech was a mere performance of that work, and performance simply cannot constitute a publication regardless of (1) the size of the audience involved, or (2) efforts to obtain widespread contemporary news coverage under circumstances that may have allowed the copying of the work.

ZALMA OPINION

I too, have a dream, that people in the United States will be judged by the content of their character not the color of their skin. To me, it is still a dream not yet fulfilled.

Since this is an insurance blog an interesting question arises as to whether CBS was insured under a personal injury cover for the defense and indemnity.

After this case was decided CBS and the King Estate reached a settlement before proceeding further in the courts. My guess is that the insurer for CBS decided it was best to cut its losses and paid the royalties to which the estate was entitled.

© 2013 – Barry Zalma

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

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

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

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

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Another Brilliant and Short Opinion From New York

Fraud in Inducement Voids Contract

The New York Supreme and/or Appellate Courts Appellate Division, First Department in an extremely brief and clear headed decision found in MBIA Insurance Corporation v. Credit Suisse Securities (Usa), LLC, et al, No. 9003 603751/09 (N.Y.App.Div. 01/15/2013):

Order, Supreme Court, New York County (Shirley Werner Kornreich, J.), entered October 13, 2011, which, to the extent appealed from, upon renewal, struck plaintiff’s demand for a jury trial, unanimously reversed, on the law, without costs, and the jury demand reinstated.

The complaint alleges repeatedly that the insurance agreement was obtained through various types of fraud, making it clear that fraudulent inducement is plaintiff’s primary claim. Thus, the provision of the agreement that waives the right to trial by jury does not apply (see Ambac Assur. Corp. v DLJ Mtge. Capital, Inc., __ AD3d __ [1st Dept 2013], Appeal No. 9002, decided simultaneously herewith; Wells Fargo Bank, N.A. v Stargate Films, Inc., 18 AD3d 264, 265 [1st Dept 2005]). It is of no consequence that the complaint does not contain the word “rescission” or expressly state that it challenges the validity of the insurance agreement (see Leon v Martinez, 84 NY2d 83, 87- 88 [1994]).

ZALMA OPINION

Some lawyers and some courts have forgotten the meaning of the word “brief.” New York’s Supreme Court, Appellate Division has not. This was a simple decision – the complaint alleged fraud in the inducement of a contract – and as such was sufficient to be brought to trial to determine if the fraud is proved and the contract should be declared void. If the contract is void, because of the fraud, the contract terms concerning right to trial by jury have no effect.

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Tri-Partite Relationship Bars Discovery of Privileged Communications

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

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

FACTS

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

STANDARD OF REVIEW

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

DISCUSSION

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Collateral Estoppel Establishes Damages

A Clairvoyant Court

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

FACTS

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

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

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

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

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

ANALYSIS

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

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

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

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

ZALMA OPINION

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

© 2013 – Barry Zalma

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

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

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

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

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What is Physical Evidence of Loss?

Duty of Insurer to Prove Exclusion Applies

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

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

FACTS

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

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

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

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

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

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

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

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

IS THERE PHYSICAL EVIDENCE?

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

DECISION & ANALYSIS

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

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

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

ZALMA OPINION

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

I would suggest revising the wording to read:

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

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

© 2013 – Barry Zalma

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

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

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

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

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Go Directly to Jail – Fraud Fails

Zalma’s Insurance Fraud Letter 

January 15, 2013

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

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

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

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

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

Zalma on Insurance

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

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

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

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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One Event – One Occurrence

Multiple Injuries Do Not Create Multiple Occurrences

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

FACTS

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

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

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

THE POLICY

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

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

THE CONSOLIDATED LITIGATION AND SETTLEMENT

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

ZALMA OPINION

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

© 2013 – Barry Zalma

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

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

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

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

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Adjuster’s License Revoked for Fraud

 No License for Fraudster

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

Facts

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

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

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

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

Analysis

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

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

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

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

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

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

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

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

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

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

Zalma Opinion

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

© 2013 – Barry Zalma

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

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

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

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

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Care Needed When Dealing With Public Adjuster

Cancel P.A. Contract At Your Own Risk

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

BACKGROUND

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

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

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

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

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

SUMMARY JUDGMENT

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

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

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

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

Illegality and Public Policy

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

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

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

THE PUBLIC ADJUSTER CONTRACT

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

NOT A CLAIM

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

 

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Never Give Up Good Tort Claim for Poor Bad Faith Claim

No Coverage – No Bad Faith

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

FACTS

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

THE POLICIES

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

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

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

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

CLAIM INVESTIGATION AND DECISION

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

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

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

TRIAL COURT DECISION

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

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

DISCUSSION

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

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

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

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

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

ZALMA OPINION

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

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

© 2013 – Barry Zalma

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

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

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

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

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Absolute Immunity

Insurance Criminal May Not Sue State Officers

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

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

BACKGROUND

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

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

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

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

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

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

DISCUSSION

Absolute Immunity

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

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

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

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

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

ZALMA OPINION

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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DUTY TO DEFEND POTENTIAL ADVERTISING INJURY

USE OF ADVERTISING IDEA

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

BACKGROUND

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

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

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

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

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

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

DISCUSSION

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

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

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

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

1. Insuring Agreement                

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

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

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

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

Coverage of Offenses Alleged

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

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

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

Industrial’s Advertising Activity

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

Causal Connection Between Advertising Activity and Advertising Injury

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

Knowing Violation of Rights Exclusion

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

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

ZALMA OPINION

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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If You Can Work You Are Not Totally Disabled

Test Is Abuse of Discretion

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

FACTS

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

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

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

THE REQUEST TO DO LIGHT WORK

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

THE INVESTIGATION

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

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

TERMINATION OF BENEFITS

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

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

THE ADMINISTRATIVE APPEAL & TRIAL

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

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

ANALYSIS

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

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

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

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

ZALMA OPINION

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

© 2013 – Barry Zalma

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

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

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

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

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Private Limitation of Action

Rights Not Exercised Promptly Are Lost

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

Course of the Proceedings

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

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

Analysis

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

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

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

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

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

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

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

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

ZALMA OPINION

The California Supreme Court, in Prudential-LMI Commercial Insurance v. Superior Court of San Diego County, 51 Cal. 3d 674, 798 P.2d 1230, 274 Cal. Rptr. 387 (Cal. 11/01/1990) reached a similar result but tolled the private limitation of action provision by stating that the limitation period is tolled from the time the insured reports a claim until the insurer officially denies the claim. From the facts of this case Offill would still find her case barred.

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

© 2013 – Barry Zalma

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

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

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

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

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Assumtion Of Risk — A Broad Defense

The Bumper Car Rule

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

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

FACTUAL BACKGROUND

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

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

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

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

DISCUSSION

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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“Public Policy” Can Rewrite an Insurance Policy

Bad Facts Make Bad Law

It has been axiomatic that an insurance company is entitled to determine for itself what risks it will accept and that it has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks. However, states have enacted mandatory insurance requirements that establish a public policy requiring insurers to provide coverage it is not willing to issue. In American Access Casualty Company v. Ana Reyes, Brigido Jasso, Individually and As Independent, 2012 IL App 120296 (Ill.App. Dist.2 12/28/2012) the Illinois Court of Appeal was asked to reverse the clear agreement made between an insured and an insurer and create insurance where it did not exist.

FACTS

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

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

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

TRIAL COURT DECISION

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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

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Insurance Fraud Continues Into New Year

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

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

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

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

Zalma on Insurance

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

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

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

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

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

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

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

© 2013 – Barry Zalma

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Happy New Year

The story that follows is based on fact but is fiction. The names, places and descriptions have been changed to protect the guilty. This story was written for the purpose of providing insurers, those in the insurance business and the insurance buying public sufficient information to recognize and join in the fight against insurance fraud. This is presented on Zalma on Insurance as gift for the New Year.

The Robin Hood Syndrome

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

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

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

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

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

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

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

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

They now pay the claims they know are fraudulent.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© 2012 – Barry Zalma

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

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

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

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

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

Posted in Zalma on Insurance | Leave a comment

Claims Made and Reported

Who’s On First

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

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

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

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

ZALMA OPINION

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

© 2012 – Barry Zalma

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

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

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

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

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Fraud By Third Party Should Not Be Considered by Arbitrator

Arbitration Award Stands

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

FACTS

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

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

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

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

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

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

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

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

DECISION

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

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

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

(3)     The arbitrators exceeded their powers;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2012 – Barry Zalma

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

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

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

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

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Definitions in Policy Gives Word Special Meaning

Liar, Liar, Pants on Fire

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

FACTS

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

CONCLUSION

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

ZALMA OPINION

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

© 2012 – Barry Zalma

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

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

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

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

 

 

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Perjury in Bankruptcy Court Defeats Bad Faith Claim

Bankruptcy Fraud Is a Crime

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

FACTS

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

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

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

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

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

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

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

THE BANKRUPTCY FILING

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

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

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

ANALYSIS

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

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

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

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

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

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

ZALMA OPINION

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

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

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

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

© 2012 – Barry Zalma

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

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

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

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

 

 

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Agreeing to Coverage Continuing After Loss Is Very Expensive

Insurers Who Make Coverage Generous Must Pay

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

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

BACKGROUND

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

Olin’s Morgan Hill Site

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

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

The American Home Policies

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

The Lloyd’s policy contained a Condition C:

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

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

Proceedings Related to the Morgan Hill Site

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

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

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

DISCUSSION

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

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

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

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

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

Proceedings on Remand

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

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

ZALMA OPINION

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

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

© 2012 – Barry Zalma

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

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

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

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

 

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Insurance Only Pays Indemnity

Policy Wording Controls

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

FACTS

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

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

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

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

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2012 – Barry Zalma

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

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

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

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

 

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Deceit Not Enough to Void Insurance in Oklahoma

Rescission Requires Factual Findings of Intentional Deceit

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

FACTS

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

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

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

ANALYSIS

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

Representations in Applications–Recovery under policy–Mortgage guaranty policies

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

1. Fraudulent; or

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

© 2012 – Barry Zalma

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

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

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

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

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Installment Fee Is Not A Premium

Installment Fees Not Premium

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

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

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

FACTUAL BACKGROUND

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

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

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

TRIAL COURT DECISION

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

ANALYSIS

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

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

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

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

STATE FARM’S APPEAL

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

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

ZALMA OPINION

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

State Farm, like many insurers, will allow their insureds who are unable to pay the full premium in a lump sum, to pay premium over time in exchange for an installment fee. Those plaintiffs who tried to get millions from State Farm may find that their efforts were for naught and will find that they must pay State Farm more than $700,000 in costs.

© 2012 – Barry Zalma

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

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

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

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

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Only Insured Can Recover UIM Benefits

WHO’S ON FIRST?

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

FACTUAL HISTORY

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

Insuring Agreement

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

1. Sustained by an insured; and

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

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

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

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

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

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

ANALYSIS

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

The “de facto insured” rule

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

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

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

Estoppel

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

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

Reasonable Expectations

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

Illusory Coverage

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

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

Public Policy

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

ZALMA OPINION

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

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

© 2012 – Barry Zalma

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

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

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

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

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No One Wants a Lawyer Who Is Nasty

Lawyer, Heal Thyself

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

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

ISSUES

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

FACTS AND PROCEDURAL HISTORY

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

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

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

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

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

BEHAVIOR OF LANEY’S COUNSEL

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

I would not wish to have representing me a lawyer who received such a serious chiding from the state supreme court.

© 2012 – Barry Zalma

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

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

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

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

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A “House” is Not Always a “Home”

Insurers Need Not Define Every Policy Term

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

FACTS

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

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

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

THE POLICY

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

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

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

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

ANALYSIS

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

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

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

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

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

ZALMA OPINION

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

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

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

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

© 2012 – Barry Zalma

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

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

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

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

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Incompetent Arsonist Gets Nothing

Only Fools Represent Themselves

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

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

FACTUAL BACKGROUND

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

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2012 – Barry Zalma

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

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

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

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

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Florida Requires “Prejudice” to Defeat a Late Claim

Two Years Five Months Late May Be Okay

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

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

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

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

ZALMA OPINION

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

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

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

© 2012 – Barry Zalma

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

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

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

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

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Court Protects One to Detriment of All Others

Insurer Refused Right to Contract

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

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

FACTS

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

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

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

DISCUSSION

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

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

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

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

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

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

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

ZALMA  OPINION

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

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

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

© 2012 – Barry Zalma

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

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

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

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

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Exception to Exclusion Controls

An Apartment Is Not A Condo

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

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

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

FACTS

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

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

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

POLICY

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

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

ANALYSIS

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

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

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

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

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

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

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

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

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

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

ZALMA OPINION

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

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

© 2012 – Barry Zalma

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

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

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

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

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No Coverage for Loss From Use of a Firearm

 

CGL Means What It Says

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

FACTS

JBC Entertainment Holdings, Inc. (JBC) operates Jillian’s nightclub in Seattle. The CGL insurance policy JBC purchased from Capitol Specialty Insurance Corporation (Capitol) provided that “[w]e will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies” subject to the firearms exclusion.

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

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

The trial court granted Capitol’s motion, ruling that the firearms exclusion is binding, applicable and wholly precludes coverage for all claims, injuries and damages asserted by Jackson Jacob Mika. The appeal followed.

ANALYSIS

JBC contends Mika’s claims for negligent hiring, training, supervision and security allege a concurrent and independent cause of his injuries and therefore fall outside the firearms exclusion.  JBC’s alleged liability for negligence is wholly dependent upon the shooting, an occurrence that is specifically excluded from coverage.

The policy simply said: “This insurance does not apply to” an enumerated list, to which the parties added “‘[b]odily injury’ or ‘property damage’ that arises out of, relates to, is based upon or attributable to the use of a firearm(s).” The appellate court found that the language is unambiguous, and it unequivocally excludes coverage from bodily injury arising from the use of a firearm. To interpret the exclusion to apply only to the insured would be contrary to the plain language of the policy.

Capitol, in other parts of the policy, included “by or on behalf of the insured” language to narrow the scope of several other exclusions. For example, the fireworks exclusion pertains only to “‘[b]odily injury’ or ‘property damage’ that arises out of, relates to, is based upon, or attributable to: (a) the use, sale or possession of fireworks by, or on behalf of, any insured.” And the “excluded activities endorsement” which precludes coverage for bodily injury and property damage arising out of activities like tobogganing, flame shows, and mechanical bull rides expressly provides that “this exclusion only applies when the foregoing activities are performed with the knowledge or consent of” the insured, additional insured, or concessionaires using the premises of the insured.

Since the firearms exclusion contains no such limiting language, the appellate court concluded a reasonable consumer would give the firearms exclusion the literal reading its clear terms demand; the exclusion for any injury or damage that arises out of, relates to, is based upon, or attributable to the use of a firearm(s) has not been limited to use of a firearm by or on behalf of the insured.

CONCLUSION

The firearms exclusion in the CGL policy unambiguously excluded coverage for all claims arising from the shooting at the nightclub, including those characterized as pre-shooting negligence claims, regardless of who used the firearm.

ZALMA OPINION

This case teaches that when an insurer writes a clear, simple and easily understood exclusion it will be enforced. Language in an insurance policy will be interpreted to favor the insured unless the language – like that in the Capitol policy – is simple, clear and unambiguous.

It is time to write insurance policies without legalese or modifiers that cause confusion.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

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“Arising Out Of” Means What it Says

Any Loss Arising Out of Asbestos Clearly Excluded

The Wisconsin Court of Appeal was asked by Michael D. Phillips, Perry A. Petta, and Walkers Point Marble Arcade, Inc. (collectively, “Phillips”) to reverse the trial court’s order granting declaratory/summary judgment to American Family Mutual Insurance Company (“American Family”).  Aquila Group, LLC, an entity owned by Daniel G. Parmelee (collectively, “Parmelee”) sold an apartment building to Phillips that was covered by the American Family policy. Phillips claimed, in Michael D. Phillips, Perry A. Petta v. Daniel G. Parmelee and Aquila Group, LLC, No. 2011AP2608 (Wis.App. 12/11/2012), that the trial court correctly determined that there was an initial grant of coverage, but erred in its determination that the asbestos exclusion found in American Family’s policy negated any insurance coverage for the damages sought in this suit and relieved American Family of the duty to defend.

Background

This case arises out of damages Phillips sustained as a result of the dispersal of asbestos in a twenty-unit apartment building that he purchased from Parmelee. Phillips sued Parmelee for breach of contract/warranty. Several months after Parmelee filed an answer, American Family filed a motion to intervene, bifurcate and stay the proceeding. In addition, it filed a counter-claim and cross-claim for declaratory judgment. American Family argued that while the business owners policy it issued to Parmelee covered the apartment building, due to exclusions listed in the policy it did not provide coverage for any damages sought by Phillips. After briefs and arguments by counsel, the trial court granted American Family’s motion to intervene and granted its motion for declaratory judgment concluding that American Family’s policy did not provide coverage to Parmelee due to the policy’s asbestos exclusion; and further, that American Family had no duty to defend Parmelee.

In his complaint, Phillips alleged that shortly after Parmelee purchased a twenty-unit apartment building in New London, Wisconsin, Parmelee decided to put the property back on the market for sale. Prior to purchasing the building, Parmelee had procured a building inspection and report. This report indicated that the building contained various defects. Included in the report was a statement by the inspector that “[t]here is probably asbestos in the basement heating supply ducts. … A professional abatement team should further investigate and mitigate the danger.”

In the course of negotiating the sale of the building to Phillips, Parmelee completed and signed a real estate condition report for the property. In this report, Parmelee indicated that he was not “aware of the presence of asbestos or asbestos-containing materials on the premises.” In addition, he indicated in the report that he was not “aware of a defect caused by unsafe concentrations of … other potentially hazardous or toxic substances on the premises.”

Parmelee accepted Phillips’ offer to purchase the apartment building for $419,000. Prior to accepting the offer to purchase, Phillips was given a copy of the aforementioned real estate condition report and Parmelee again represented in the offer to purchase that “as of the date of acceptance [he had] no notice or knowledge of conditions affecting the Property.”

Asbestos was discovered on the property when a contractor hired by Phillips attempted to remove some pipes. As a result, the building was contaminated with asbestos, and the tenants were required to leave. As a result of the discovery of the asbestos, Phillips suffered serious financial problems, which ultimately led to the foreclosure of this and other properties owned by Phillips.

In granting American Family’s motion, the trial court determined that the “negligence claim triggered an initial grant of coverage,” but the asbestos exclusion applied. Phillips’ appeal followed.

Analysis

When interpreting an insurance policy the court first examines the policy’s insuring agreement to determine whether it makes an initial grant of coverage for the plaintiff’s claim. If the claim triggers an initial grant of coverage the court must then determine whether any of the policy’s exclusions preclude coverage.

There was an initial grant of coverage.

Phillips contends that there is an initial grant of coverage under the policy’s language because the facts alleged in the complaint establish that there was both an “occurrence” and “property damage.” The facts alleged in the complaint and the deposition answers create the possibility of an accident. Because an occurrence is an accident, Phillips fulfills this policy’s definition.

The policy definition of “property damage” in the case before us includes “[l]oss of use of tangible property that is not physically injured.” Consequently, Phillips has fulfilled the requirements to establish both an “occurrence” and “property damage” and there is an initial grant of coverage.

The asbestos exclusion

The asbestos exclusion found in the policy reads, in pertinent part: “This insurance does not apply to … ‘property damage’ … with respect to: a. Any loss arising out of, resulting from, caused by, or contributed to in whole or in part by asbestos, exposure to asbestos, or the use of asbestos. … ‘Property damage’ also includes any claim for reduction in the value of real estate or personal property due to its contamination with asbestos in any form at any time. b. Any loss, cost, or expense arising out of or in any way related to any request, demand, order, or statutory or regulatory requirement that any insured or others identify, sample, test for, detect, monitor, clean up, remove, contain, treat, detoxify, neutralize, abate, dispose of, mitigate, destroy, or any way respond to or assess the presence of, or the effects of, asbestos. ….”

Phillips claimed the language was ambiguous. His attempt to create an ambiguity was unavailing. First, the Court of Appeal observed that the exclusion here is very broad. The opening sentence advises the insured that “any loss arising out of, resulting from, caused by, or contributed to, in whole or in part by asbestos, exposure to asbestos or the use of asbestos” is excluded. Given this language, the exclusion would include property damage caused by the accidental dispersal or the mere presence of asbestos.

A reasonable person reading the exclusion would not believe that the property damage had to arise out of the “exposure to” or “the use of asbestos” and not to “accidental dispersal or mere presence.” The comprehensive language used in the exclusion requires otherwise and the wording in the exclusion would not cause a reasonable insured to think that the exclusion only covers asbestos in its friable state. The reasonable insured would, in all likelihood, not know what “friable asbestos” is.

The Court of Appeal, therefore, agreed with American Family that “the policy language is clear that if any part of any loss is caused in any way by asbestos, the policy provides no coverage.”

The Court of Appeal noted that its conclusion was not novel; exclusions similar to that found in the American Family policy have been given effect in other jurisdictions. For example, in Pro-Tech Coatings, Inc. v. Union Standard Insurance Co., 897 S.W.2d 885, 891 (Tex. App. 1995);  Rolyn Cos., Inc. v. R & J Sales of Texas, Inc., 671 F. Supp. 2d 1314, 1331-32 (S.D. Fla. 2009); State Farm Fire & Casualty Co. v. Acuity, 2005 WI App 77, 280 Wis. 2d 624, 695 N.W.2d 883, where a Wisconsin court approved a pollution exclusion, stating that “[t]he phrase ‘arising out of’ is broad, general, and comprehensive,” and “means something more than direct or immediate cause such as originating from, growing out of, or flowing from.” Using that definition “arising out of,” it is clear that a reasonable insured would believe that any damages caused by asbestos in any number of ways was excluded from coverage.

The petition alleges negligence in the handling of material containing asbestos fibers and damages resulting from the mishandling of that material. The characterization of several different acts of negligence is of no consequence because each act relates to the asbestos exposure and nothing else. The same is true here – all damages are related to asbestos in some form. Consequently, there are no other damages beyond those arising out of the existence of asbestos in the building.

Finally, because the asbestos exclusion precludes coverage, the Court of Appeal had no reason to address the parties’ arguments concerning the application of the “total pollution” exclusion or the “expected or intended injury” exclusion.

ZALMA OPINION

Insurance is, and always has been, nothing more than a contract. When the terms and conditions of a policy are clear and unambiguous they must be applied and enforced. When a policy uses a phrase like “arising out of asbestos” it means nothing more than what it says. Phillips damages were caused as a result of asbestos contamination that he might have avoided had the person who sold him the property had advised him of the hazards. There is no question that person was either negligent or intentionally defrauded Phillips. Regardless, the damage arose out of asbestos and the exclusion applies and cannot be rewritten by a court after the loss.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

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Desire Doesn’t Change Policy Wording

No Ambiguity When Entire Policy Is Read

Insurance policies are not interpreted by their individual parts, phrases and sections but must be read as an entire contract. Even if a single provision of the policy seems ambiguous it is imperative to read the remainder of the contract to determine if an unambiguous meaning of the entire contract can be found. In Area Erectors, Inc., Corporation v. Travelers Property Casualty, 2012 IL App 111764 (Ill.App. Dist.1 12/07/2012) the Illinois Court of Appeal insisted on reading and interpreting an entire policy before making its decision.

FACTS

Plaintiff Area Erectors, Inc. (AEI), filed a complaint for declaratory judgment in the circuit court of Cook County, against defendant Travelers Property Casualty Company of America (Travelers), seeking a declaration that it is entitled to recover the replacement costs of its damaged property and seeking statutory penalties from Travelers for its vexatious refusal to settle its claim. At issue is the measure of the valuation of the property under the policy.

In its complaint for declaratory judgment, AEI alleged that an American 7150 crane it owned was damaged when an unexpected microburst storm came through a construction site and toppled concrete walls onto the crane. Two days later a Link-Belt crane owned by AEI was damaged in an unrelated incident when the boom hoist cable snapped and fell onto the manlift.

AEI is the insured under a commercial inland marine insurance policy issued by Travelers. AEI filed claims under the policy for the two damaged cranes. AEI argued it was entitled to recover the replacement cost for the loss of the American 7150 crane. Travelers argued AEI was entitled to recover the actual cash value of the equipment under the policy, a lesser sum than replacement cost.

Travelers determined the 7150 crane was a total loss. Travelers offered $379,868.75 in settlement of AEI’s claim on the American 7150 crane. This sum represented what Travelers calculated as the actual cash value of the crane less a $25,000 deductible. Travelers alleged it tendered the proper amount due under the policy, which is the actual cash value of the crane as specified under paragraphs A and B of the “‘Contractors Equipment’ Coinsurance and Valuation” endorsement.

Travelers filed an answer and affirmative defenses and a motion for judgment on the pleadings. In granting Travelers motion for judgment on the pleadings, the trial court determined that the actual cash value was the proper valuation under the policy.

ANALYSIS

Judgment on the pleadings is proper where the pleadings disclose no genuine issue of material fact and the movant is entitled to judgment as a matter of law. In ruling on a motion for judgment on the pleadings, the court must consider only those facts apparent from the face of the pleadings, judicial admissions in the record and matters subject to judicial notice.

THE POLICY

 Paragraph A of the endorsement establishes the minimum amount of insurance AEI was required to maintain on its equipment before a coinsurance penalty is incurred. Regardless of the age of the equipment, AEI was required to insure its property for at least 80% of its value to avoid the penalty in the event of a loss. The value of “listed” items less than five years old is the replacement cost. The value of listed items over five years old and unlisted items is the actual cash value. It is undisputed that both cranes were more than five years old at the time of the loss.

Paragraph B of the endorsement discusses the valuation of “Contractors Equipment” in the event of a loss. Paragraph B provides two formulas to calculate the value of lost property depending upon which of two valuations applies: “(1) Items to which Replacement Cost applies” and “(2) items to which Actual Cash Value applies.” AEI alleges that paragraph B does not provide guidelines for when replacement costs valuation applies or when actual cash value applies. AEI argued that the endorsement created an ambiguity that it asked the Court of Appeal to construe against Travelers.

When the entire “‘Contractors Equipment’ Coinsurance and Valuation” endorsement is read the Court of Appeal concluded that guidance was provided in paragraph A of the endorsement, which immediately precedes paragraph B. In the event of a loss, paragraph A requires AEI’s equipment to be insured for at least 80% of its value to avoid a coinsurance penalty. The value of “listed” items less than five years old is the replacement cost and the value for “listed” equipment more than five years old and “unlisted” items is the actual cash value.

There is nothing in the “‘Contractors Equipment’ Coinsurance and Valuation” endorsement that would reasonably lead to the conclusion that the provisions in paragraph A of the endorsement should be read in a vacuum and not considered when reading paragraph B of the very same endorsement.

If the court adopted AEI’s interpretation of the policy, the result would be the American 7150 crane would be valued at actual cash value for purposes of determining whether AEI carried the minimum amount of insurance to avoid the coinsurance penalty and valuing the same crane at replacement cost to determine the loss. To do so would be inequitable and when the policy is read as a whole, including paragraphs A and B of the “‘Contractor’s Equipment’ Coinsurance and Valuation,” the endorsement is not ambiguous and the actual cash value is the proper method of valuation for the damaged American 7150 crane.

Based on the record Travelers did not act in a vexatious and unreasonable manner in settling the claim on the American 7150 crane because a bona fide coverage dispute existed. According to the record, Travelers offered AEI the actual cash value of the American 7150 crane shortly after it was damaged. AEI responded by disputing whether the actual cash value was the proper method of valuation for the claim, claiming replacement cost is the proper method. This bona fide coverage dispute ultimately resulted in the instant action.

In approximately five weeks from the date the crane was damaged, Travelers informed AEI of its repair estimate and the amount it would pay under the policy. This is neither vexatious or unreasonable.

The record shows that Travelers responded in a reasonable time to AEI’s initial claim on the Link-Belt claim and a bona fide coverage dispute existed.

ZALMA OPINION

Every insured wants to recover full replacement cost after a loss occurs and to pay premium based upon actual cash value before a loss. The Travelers’ policy was willing to pay full replacement cost if an item of equipment was less than five years old and only actual cash value if the equipment is more than five years old. The obvious reason for different methods of valuation is that an old piece of equipment that could be replaced with a new piece of equipment creates a moral or morale hazard where it would be more profitable for the insured to place the equipment in a place where it could be damaged to profit from the insurance.

Travelers protected itself from the moral hazard by having two types of valuation. It did not, no matter how hard AEI argued, create an ambiguity it avoided the greed evidenced by AEI’s suit seeking to recover more than it agreed it could receive when it bought the policy.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

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No Damages – No Coverage

Technicolor Clean Up Costs Not Covered

Several years ago, Thomson, Inc., acquired the assets of Technicolor, Inc., which included, among other things, three contaminated former film-processing sites. Eventually, local environmental authorities directed Thomson to remediate the contamination at the sites, an expensive and ongoing process for which Thomson seeks indemnification from Continental, who insured Technicolor from 1969 to 1974. Thomson asked the Indiana Court of Appeal in Thomson, Inc. N/K/A Technicolor USA, Inc., Technicolor, Inc., and v. Continental Casualty Co.; Travelers Casualty & Surety Co. & Travelers, No. 49A05-1201-PL-24 (Ind.App. 12/06/2012) to rule that the umbrella policy Continental issued to Technicolor covers losses resulting from orders from administrative agencies, as occurred here. Continental responded that its liability is limited to losses resulting from courtroom litigation.

After both parties moved for summary judgment on the question of whether coverage exists, the trial court ruled in Continental’s favor. Thomson Inc. (collectively, “Thomson”) now appeal from the trial court’s grant of summary judgment in favor or Appellee/Defendant Continental Casualty Co.

FACTS

Beginning in 1924, Consolidated Film Industries (“CFI”) operated a film-processing facility at 959 Seward Street in Hollywood, California. In February of 2000, Technicolor, Inc., of Hollywood, California, purchased CFI. In 2002, operations ceased at the Hollywood facility, and all nine buildings at the facility were demolished in 2005. Beginning in 1936, Technicolor Limited, a wholly-owned English subsidiary of Technicolor, Inc., operated a film-processing facility on Bath Road, West Drayton, United Kingdom. Beginning in 1964, Technicolor, Inc., operated a film-processing facility at 4050 Lankershim Boulevard in North Hollywood, California. In February of 2001, Thomson, Inc., acquired Technicolor, Inc., and Technicolor Limited, consequently also acquiring the three film-processing facilities.

Testing revealed chlorinated solvent contamination at the Hollywood, North Hollywood, and West Drayton facilities, with the addition of diesel fuel contamination at the North Hollywood site. In 2009, Thomson notified Continental that it had been required by local authorities to clean up the three sites. As of November 9, 2011, remediation had cost approximately $4,800,000 for the Hollywood site, over $1,000,000 for the West Drayton site, and approximately $730,000 for the North Hollywood site, although none had been completely cleaned up.

The Umbrella Policy

From 1969 to 1974, Continental issued three primary liability insurance policies to Technicolor, Inc. From August 15, 1969, to January 1, 1973, Continental also issued one umbrella policy,  (“the Umbrella Policy”), to Technicolor, Inc. Coverage B of the Umbrella Policy provides, in relevant part, that The company will indemnify the insured with respect to any occurrence not covered by underlying insurance, or with respect to damages not covered by underlying insurance but which results from an occurrence covered by underlying insurance, for ultimate net loss in excess of the insured’s retained limit “which the insured shall become obligated to pay as damages by reason of liability imposed upon the insured by law or assumed by the insured under any contract because of personal injury property damage, or advertising injury to which this coverage applies, caused by an occurrence.”

The insurer also agreed that with respect to an occurrence not covered in whole or in part by underlying insurance or to which there is no other insurance in any way applicable, shall have the right and duty “to defend any suit against the insured seeking damages on account of such personal injury, property damage or advertising injury, even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company’s liability has been exhausted.”  “Ultimate net loss” was defined as “the sums paid as damages in settlement of a claim or in satisfaction of a judgment for which the insured is legally liable after making deductions for all other recoveries and also includes investigation, adjustment, appraisal, appeal and defense costs paid or incurred by the insured with respect to damages covered hereunder.” (Emphasis added)

THE SUIT

Thomson, although the damage was in California and the U.K., surprisingly filed suit in Marion County, Indiana Superior Court, seeking coverage from various insurance companies for remediation of the Hollywood, North Hollywood, and West Drayton sites. Thomson and Continental agreed that California law applied and then both moved for partial summary judgment against Continental, seeking a declaration of coverage for the remediation sites under Coverage B of the Umbrella Policy. On August 1, 2011, Continental cross-moved for summary judgment against Thomson, contending that under California law the Umbrella Policy did not cover costs and expenses Thomson incurred “to respond to administrative directives to remedy environmental contamination[.]”

The trial court granted Continental’s summary judgment motion and denied Thomson’s as to all three remediation sites.

DISCUSSION AND DECISION

Thomson concedes that there is no coverage under the primary liability policies Technicolor, Inc., had with Continental from 1969 to 1974. Thomson argues, however, that coverage exists under the Umbrella Policy. Specifically, Thomson contended that the language of Coverage B and the Umbrella Policy’s definition of “ultimate net loss” provide coverage.

The Indiana Court of Appeal recognized that the fundamental goal of contractual interpretation is to give effect to the mutual intention of the parties. Such intent is to be inferred, if possible, solely from the written provisions of the contract and if contractual language is clear and explicit, it governs.

Under California insurance law, as it relates to commercial general liability policies, “damages” are limited to losses resulting from a “suit,” which is understood to refer, in general, to courtroom litigation. The duty to defend a “suit” seeking “damages” under pre-1986 CGL policies is restricted to civil actions prosecuted in a court, initiated by the filing of a complaint, and does not include claims, which can denote proceedings conducted by administrative agencies under environmental statutes. Likewise, the duty to indemnify for all sums that the insured becomes legally obligated to pay as damages.  Consequently, unless the Umbrella Policy provides coverage for proceedings beyond “suits” or for indemnity for losses beyond “damages,” there is no coverage under California law.

The Court of Appeal found that a California decision concluded that coverage did not extend beyond “damages,” observing that the coverage clause imposing the duty to indemnify is clear in its limitation to court-rendered damages. The coverage clause in the Umbrella Policy provides that “[t]he company will indemnify the insured ‘for ultimate net loss’ which the insured shall become obligated to pay as damages.” The coverage clause in the Umbrella Policy limits “ultimate net loss” to “damages.”

The Umbrella Policy’s definition of “ultimate net loss” is also explicitly limited to “damages.”

The Umbrella Policy limits Continental’s indemnity obligations to “damages.” Consequently, the Court of Appeal concluded that Continental has no obligation to indemnify Thomson for the remediation of the Hollywood, North Hollywood, and West Drayton sites as a matter of law.

ZALMA OPINION

This decision is proof that “new and improved” is not always better. There is no coverage for clean-up orders without court judgment or damages if coverage is sought from a pre-1986 policy and is available if sought from a post-1986 policy. Since there was no suit and no damages found by court judgment there is no coverage for defense or indemnity.

Although Thompson filed in Indiana, rather than California or the U.K., where the damages were, it gained no advantage because the court applied California law.

This case teaches it is best to read and analyze an insurance policy in accordance with the law of the jurisdiction before filing suit.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

 

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INSURERS SUE FRAUD PERPETRATORS

Insurers Proactive Against Fraud

The best defense in battle has always been a strong offence. In litigation the same is true. Insurers have, for decades been passive victims of insurance fraud, considering it to be a cost of doing business. Premiums were increased to cover the extra cost of paying fraudulent claims. Some insurers learned that once insurance criminals learned that they would pay fraudulent claims that the number of fraudulent claims increased exponentially and they could not increase premiums fast enough to cover their losses to fraud. Those insurers became proactive in their efforts against fraud.

In The People Ex Rel. Fire Insurance Exchange et al v. Neil R. Anapol et al, No. B233521 (Cal.App. Dist.2 12/06/2012) the Fire Insurance Exchange and Mid Century Insurance Company (collectively Farmers) uncovered what it believed to be a massive insurance fraud ring engaged in the submission of false and/or inflated claims for smoke and ash damage arising from several Southern California wildfires. It brought a qui tam action against several members of the alleged ring, including two attorneys, Neil R. Anapol and Robert B. Amidon, who submitted the purportedly false insurance claims on the part of Farmers’s insureds. As against the attorneys, Farmers alleged both the submission of false claims and the use of cappers to obtain insureds willing to pursue such claims.

The attorneys brought motions to strike the complaint under Code of Civil Procedure section 425.16 (anti-SLAPP motions), arguing that their pursuit of insurance claims and acts in obtaining clients constituted prelitigation conduct protected by their First Amendment right to petition. The trial court denied the motions, on the basis that the attorneys had failed to establish protected conduct, specifically relying on authority holding that the submission of insurance claims does not constitute protected conduct under the anti-SLAPP law.

The attorneys appealed. The Court of Appeal agreed with the attorneys that, under the proper circumstances, submission of an insurance claim can constitute prelitigation conduct protected by the anti-SLAPP law. However, mere bald assertions that the claims were submitted with the subjective intent that litigation would follow are insufficient, without more, to constitute prima facie evidence that the insurance claims constituted prelitigation conduct.

FACTUAL

The Court of Appeal found the following facts to be clear:

(1)     There were wildfires in Southern California in 2003, 2007, 2008, and 2009;

(2)     Attorney Anapol represented a number of Farmers’s insureds in their pursuit of smoke and ash claims arising out of the 2003 wildfire;

(3)     Attorney Amidon represented a number of Farmers’s insureds in their pursuit of smoke and ash claims arising out of the wildfires in 2007, 2008, and 2009;

(4)     Glenn Sims, and/or one of the companies with which he was affiliated, was involved to some degree in the claim handling process on behalf of the insureds;

(5)     Farmers paid on some, but not all, of the claims; when it did pay, it often did not pay the full amount sought by the insureds; and

(6)     Attorneys Anapol and Amidon represented Farmers’s insureds in bad faith actions arising out of Farmers’s handling of the smoke and ash claims, some of which are still pending.

Farmers alleged there was a conspiracy to defraud Farmers (and other insurance companies), which was the brainchild of Sims.  Sims was what is known as a “catastrophe chaser.” He travelled the country, following natural disasters. After a disaster, he would advertise in the area for clients, letting them know that he could obtain substantial insurance benefits for them for damages about which they may have been unaware. Sims was not a public adjuster, however, and chose to conduct his business through the use of attorneys. Thus, when a homeowner would contact him, Sims would have the client execute a retainer agreement with an attorney with whom Sims worked. Sims would then submit to the insurer a letter from the attorney designating Sims as a “property damage consultant” on the claim, and requesting the insurer to negotiate directly with Sims. Sims would then send someone to “scope” the claim and create a repair estimate, often based only on the size and contents of the home, with no attention paid to whether there was evidence of actual damage. Sims would submit the estimate and negotiate a settlement of the claim. Once a settlement was received by the attorney from the insurance company, it was divided, on a percentage basis, between the client, the attorney, and Sims (and his associates). In sum Farmers alleged that the part played by the attorneys in this conspiracy included:

(1)   paying Sims to obtain clients to submit insurance claims; and

(2)   submitting false and/or inflated damage estimates in support of claims.

The attorneys view of the facts was different. According to the attorneys, all of their clients were legitimate referrals; the attorneys did not pay Sims for obtaining clients. Moreover, according to the attorneys, all of the damage estimates submitted were legitimate.

In the alternative, the attorneys take the position that if Sims submitted fraudulent documents in support of the claims, the attorneys had no knowledge of this fact, and believed all of the claims to be legitimate. Finally, the attorneys argue that Farmers improperly denied or undervalued the claims, causing the attorneys to bring bad faith actions.

The Anti-SLAPP Motions

Both Attorneys brought anti-SLAPP motions. Each attorney argued that the suit was brought in retaliation for the attorneys’ pursuit of legitimate claims and bad faith actions against Farmers. As to the issue of whether the conduct for which they were sued was protected by the anti-SLAPP statute, each attorney made a slightly different argument. Attorney Anapol argued that all of his alleged conduct underlying Farmers’s complaint was protected prelitigation conduct, as his submission of claims constituted prelitigation negotiations to settle the smoke and ash claims without the need of lawsuits. In support of his motion, Attorney Anapol submitted a declaration indicating that of the 42 insurance claims at issue from the 2003 wildfire, 29 were settled, 5 were ultimately dropped, and 8 were resolved in favor of the insureds after arbitration.

Attorney Amidon, in contrast, argued that his alleged conduct constituted both protected petitioning activity and protected speech. As to the issue of protected speech, Attorney Amidon argued that his supposed capping activity constituted protected speech on an issue of public interest, in that soliciting clients constitutes speech and the wildfires were of considerable public interest.

ISSUES ON APPEAL

The main issue raised by the parties is whether precedent completely bars all insurance claims from ever constituting prelitigation conduct. The Court of Appeal concluded that it does not; instead, submitting an insurance claim in the usual course of business does not constitute prelitigation conduct, but circumstances may exist  such that submitting the claim is protected prelitigation conduct. Defendants like the attorneys must make a prima facie case that the claims submitted in this case constitute prelitigation conduct. The Court of Appeal concluded the attorneys did not prove a prima facie case.

There is a two-step process for evaluating an anti-SLAPP motion.

First, the court decides whether the defendant has made a threshold showing that the challenged cause of action is one arising from protected activity.The moving defendant’s burden is to demonstrate that the act or acts of which the plaintiff complains were taken in furtherance of the defendant’s right of petition or free speech under the United States or California Constitution in connection with a public issue. Second, as defined in the statute and if so, whether the plaintiff met its evidentiary burden on the second step.

If a prelitigation statement concerns the subject of the dispute and is made in anticipation of litigation contemplated in good faith and under serious consideration, it falls within the scope of the statute. When an attorney seriously and in good faith contemplates litigation, and sends the opposing party a demand letter, the demand letter has been held to constitute a protected prelitigation statement.

The submission of a claim is often the first time an insurer becomes aware that its insured seeks payment under the contract. Thus, it cannot be determined, by the mere fact of submission of a claim, that the claim has been submitted merely for adjusting or if it has been submitted in anticipation of litigation contemplated in good faith and under serious consideration.

Although both the wildfires and the business of insurance are matters of public interest none of the statements or acts of the attorneys which form the basis for Farmers’s complaint were made in connection with these issues. The attorneys allegedly used cappers to find clients to bring individual claims against their insurers for damages to their homes individually suffered in the fires. Such claims are indisputably private in nature.

As the attorneys have failed to make a prima facie showing that the conduct underlying Farmers’s complaint arises from protected acts of petitioning or speech, the anti-SLAPP statute does not apply. The trial court’s order denying the anti-SLAPP motions will be affirmed.

ZALMA OPINION

Farmers should be commended for bringing an action against those it reasonably believes were engaged in insurance fraud. The court correctly noted that an insurance claim is not filed, normally, in anticipation of litigation. Usually, and in the great majority of all claims filed, they are filed in anticipation only of receiving the benefits promised by the policy. Litigation is only anticipated after the adjustment of the claim fails.

It is time for insurers to stop treating insurance fraud as a cost of doing business that they can pass on to their customers and add to their profit picture by aggressively working to defeat fraud.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

 

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Lack Of Waiver of Subrogation is Expensive

Interinsured Claims Exclusion Does not Apply

Delos Insurance Company appealed a judgment entered in favor of respondent Gemini Insurance Company, after Gemini’s motion for summary judgment was granted. In Gemini Insurance Company v. Delos Insurance Company, No. B239533 (Cal.App. Dist.2 12/05/2012) a subrogating insurer attempted to recover what it paid for fire damages caused by the tenant of its insured to the leasehold property and property of others. The tenant’s insurer refused because it also insured the landlord as an additional insured.

FACTS

A restaurant’s insurance policy included an additional insured endorsement which made the restaurant’s landlord an additional insured with respect to the landlord’s liability arising from the restaurant’s acts, undertaken in the course of the restaurant’s operations on the leased premises. The insurance policy also had an exclusion for claims or suits between insureds.

The tenant negligently started a fire on the leased premises. The fire damaged the landlord’s property, and the landlord sought to recover from the restaurant for the damages.

Delos insured a restaurant called Bobby’s Focsle and its owners, Helen and Bobby Boyett (hereafter “Bobby’s”). Bobby’s was located in the Loch Lomond Marina in San Rafael, and its landlord was San Rafael Marina, LLC, dba Loch Lomond Marina (hereafter “Loch Lomond”). A fire at Bobby’s caused damage to Loch Lomond’s property, and to another business located in the marina, Arena Yacht. Both Arena Yacht and Loch Lomond were insured by Gemini for property damage.

Arena Yacht and Loch Lomond made claims on their property insurance. Gemini paid Arena Yacht $65,088 and paid Loch Lomond $288,259, for the damage caused by the fire, then filed an action in subrogation against Bobby’s, alleging that Bobby’s negligence caused the fire. Delos defended Bobby’s in that action.

The case settled. Bobby’s and Gemini entered into a stipulated judgment for the total which Gemini had paid to its insureds. Delos paid $65,088 of the judgment, that is, the amount Gemini paid to Arena Yacht. Gemini agreed that it would not execute against Bobby’s for the remainder, and Delos and Gemini agreed to further litigate Delos’s obligations. To that end, Gemini filed this suit under Insurance Code section 11580, subdivision (b)(2), which authorizes an insured’s judgment creditor to bring an action against the insurer.

Although the case was decided on summary judgment, there were never any disputed facts. Instead, stipulated facts were submitted to the trial court, and the parties agreed that there was only one issue, which involved interpretation of the Delos policy and was an issue of law.

THE ISSUE

Bobby’s insurance did not provide coverage for any claim or suit brought by another insured. Delos’s position was that Loch Lomond was an insured on Bobby’s policy. Thus, Delos did not cover Bobby’s for a claim by Loch Lomond for damage to Loch Lomond’s property. Gemini’s position was that Loch Lomond was not an insured under Bobby’s Delos policy.

The trial court agreed with Gemini, finding that “pursuant to the plain language of the Delos policy, including the additional insured endorsement to the Delos policy, Loch Lomond was never an ‘insured’ under the Delos policy.” The court entered judgment in Gemini’s favor in the amount of $288,259, the amount Gemini had paid to Loch Lomond for the damage caused by the Bobby’s fire.

ANALYSIS

The Interinsured Claims and Suits Exclusion in Bobby’s Delos policy provides that:

“The liability coverage afforded by this policy does not apply to any claim or ‘suit’ for damages by any ‘insured’ against another ‘insured’ because of ‘bodily injury’, ‘property damage’, ‘personal injury’ or ‘advertising injury’. We have no obligation to defend or indemnify any ‘insured’ as to any such claim or ‘suit’ by another ‘insured’.”

Delos cites that exclusion and the policy’s definition of “insured,” which states that:if you are designated in the declarations as . . . an organization other than a partnership, joint venture, or limited liability company, you are an insured.” As Delos points out, the Additional Insured endorsement to the policy lists Loch Lomond as an additional insured.

All of this supports Delos’s position, but there is another relevant policy provision which compels a result to the contrary. An endorsement titled “Additional Insured – Managers or Lessors of Premises” reads:

“Who is an Insured (section II) is amended to include as an insured the person or organization shown in the Schedule but only with respect to such person or organization’s liability which both (1) arises out of the ownership, maintenance or use of that part of the premises leased to you and shown in the Schedule, and (2) occurs on that part of the premises leased to you and shown in the Schedule, and (3) results from and by reason of your act or omission or an act or omission of your agent or employee in the course of your operations at that part of the premises leased to you and shown in the Schedule.”

As Gemini reads this provision, Loch Lomond is an additional insured only when and where it faces liability arising from Bobby’s acts, undertaken in the course of Bobby’s operations on the leased premises. The trial court agreed. An additional insured provision is designed to protect parties who are not named insureds from exposure to vicarious liability for acts of the named insured.

The parties agreed that no one ever sought to hold Loch Lomond liable for the fire at Bobby’s. To the contrary, in the underlying case, Loch Lomond sought to recover from Bobby’s. The court of appeal concluded that the interinsured claims and suits exclusion did not apply.

While it is true that the endorsement did not delete the definition of insured, that is no help to Delos, because the modification makes its position clear.

Delos argued that the additional insured endorsement merely changes the scope of the coverage afforded to the additional insured. The record establishes that Loch Lomond insisted as a condition of the lease that Bobby’s carry liability insurance, and insisted that it be named as additional insured on the Bobby’s policy. This is no doubt a common practice among commercial landlords, and indeed the policy endorsement is designated as one for landlords. Loch Lomond would have done this in order to protect itself in the event that it was sued for Bobby’s negligence. It surely would not have done so in order to limit its ability to recover, in the event that it was injured by Bobby’s negligence.

ZALMA OPINION

This suit could have easily been avoided by simply including in the lease agreement a mutual waiver of subrogation and a provision in the two policies an agreement allowing waiver of subrogation. In fact, it could be argued – although it was not – that the property insurance was taken out for the mutual benefit of the landlord and the tenant and that, as a result, the landlord waived its right of subrogation against the insured by agreeing to rely upon its own property insurance.

A prudent lessor requires a tenant to insure it against liability for suits resulting from the action of the tenant. It will also require the tenant to pay its fair share of the property insurance on the building leased with other tenants and then each will agree that they will rely on the proceeds of their own insurance and waive their insurer’s right to subrogate against each other. The landlord and tenant in this case were not prudent and were compelled to litigate.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

 

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Life Insurer Must Pay If No Evidence of Murder by Beneficiary

No Conviction of Murder – Pay

There is no question that a life insurer need not pay life insurance benefits to a beneficiary who murdered the insured. To allow a murderer to profit from his crime is against public policy and common morality. In Eric Debartolo v. American General Assurance Company, and Does 1 Through 25, Inclusive, No. 1:12-CV-01419-LJO-DLB (E.D.Cal. 11/29/2012) the insurer suspected that the plaintiff, Eric Debartolo had killed his parents. Their suspicion was based upon comments from the investigating detective that he could not eliminate Debartolo as one of the killers.

FACTS

Plaintiff, Eric DeBartolo, sought payment of benefits as the sole beneficiary of an Accidental Death and Dismemberment group insurance policy (“Policy”) issued by Defendant American General Assurance Company (“AGAC”) to Plaintiff’s mother, Sandra DeBartolo, providing her with basic and supplemental coverage in the amount of $3,000.00 and $100,000.00 respectively, as well as family protection insuring her spouse, Gary DeBartolo, for $60,000. Sandra and Gary DeBartolo were murdered in their home on July 22, 2009, and, although other individuals have been arrested and charged with the murder, Plaintiff has not been eliminated as a suspect.

AGAC refused to pay Plaintiff’s claim, citing California Probate Code § 252, which provides “[a] named beneficiary of a life insurance policy, or other contractual arrangement who feloniously and intentionally kills the person upon whose life the policy is issued is not entitled to any benefit under the policy, or other contractual arrangement, and it becomes payable as though the killer had predeceased the decedent.”

AGAC submitted extra-record evidence that purports to establish:

  1. that one of its agents has been in regular contact with the Detective investigating the murders;
  2. on numerous occasions, from December 2009 through the filing of this motion in September 2012, the Detective informed AGAC’s agent that Plaintiff “had not been eliminated” as a suspect in the deaths; and
  3. that another charged suspect “could” implicate Plaintiff in the crime.

The District Court found that AGAC’s suggestion that the submitted declarations should be considered “because the complaint “specifically refers” to Detective Toscano’s investigation is patently absurd.” By this logic, any and all evidence related to any allegation in any complaint could be considered on a 12(b)(6) motion. As a result the court refused to consider the evidence and added that even if, arguendo, the evidence could be considered, the additional information would not alter the outcome of this motion.

ISSUE

Plaintiff filed this lawsuit on August 29, 2012, alleging AGAC’s refusal to pay out on his claim constitutes breach of contract and breach of the implied covenant of good faith and fair dealing. AGAC claims to be “[u]nable to pay the AD&D insurance benefits without avoiding potential liability to another party who may be the proper beneficiary if Plaintiff is convicted” of murdering his parents. Accordingly, AGAC has moved to dismiss Plaintiff’s lawsuit as “premature.”

DECISION

This motion is entirely without merit. In California, unreasonable delay in paying a covered claim may support a claim both for breach of contract and breach of the implied covenant of good faith and fair dealing. While California Penal Code § 242 precludes receipt of insurance benefits by a beneficiary who murdered (or conspired to murder) the named insured, only a judgment of conviction is conclusive for purposes of excusing payout.

The question of whether AGAC has unreasonably delayed payment of Eric DeBartolo’s claim cannot be decided as a matter of law. However, Plaintiff has properly stated claims for breach of contract and breach of the covenant of good faith and fair dealing. Among other things, he has alleged that AGAC “willfully failed to evaluate the claim objectively and properly or to conduct and diligently pursue a thorough, fair and objective investigation” and that “during the three-year period defendant withheld paying the claim, it never sought the advice of legal counsel.”

In light of the “Slayer Statute’s” entire statutory scheme, AGAC cannot simply sit on its hands and wait for the police to either indict Plaintiff or eliminate him as a suspect. AGAC’s motion to dismiss those claims as premature is DENIED.

ZALMA OPINION

Insurance fraud is a cancer on the insurance industry that has metastasized into a crime that takes from $80 to $300 billion a year from the American insurance buying public. It is important that insurance companies actively work to prevent insurance fraud. As I have said for the last 17 years in Zalma’s Insurance Fraud Letter insurers must do everything they can to defeat insurance fraud.

However, as this case clearly points out, work against insurance fraud must be based upon evidence, not surmise. AGAC had no evidence that DeBartolo killed his parents. All it had was the suspicion of a police officer who could only say that he could not eliminate him as a possible murderer. He did not have sufficient evidence to arrest, let alone try DeBartolo for the patricide.

To defend a claim on the basis of fraud; to accuse a person of patricide; to claim that a life insurance beneficiary is a murderer without evidence is just plain stupid. If they had performed a complete and thorough investigation, had gathered evidence that they believed a preponderance of the evidence would establish he killed, or conspired to kill his parents, they should have denied the claim. To just sit by and wait for the police, who have no interest in insurance and no obligation to deal with the beneficiary or the insurance company with the utmost good faith, is inept and incompetent.

When the case eventually goes to trial if AGAC cannot produce the evidence it will prove they conducted an incompetent, unfair and unreasonable investigation and failed to treat the beneficiary with utmost good faith. If the evidence established DeBartolo actually killed or conspired with others to kill his parents, the insurer will obtain a defense verdict. Of course, on a motion to dismiss, I would have expected to see some evidence, not just the guess of a police officer.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

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Claims File Protected Work Product

DISCOVERY OF CLAIM FILE BEFORE COVERAGE DECISION PROHIBITED

When an insured waits more than four years to report a wind damage loss should assume that the insurer will question the claim, reserve its right to investigate without waiving policy defenses, and that the insurer will anticipate litigation if it refuses coverage. The insured, before State Farm Florida Insurance Company (SFF), made a decision on the claim, sued SFF and sought the entire claim file. SFF asked the Florida Court of Appeal to review the trial court’s order which allowed discovery of activity log notes, emails, and photographs contained in the insurer’s claim file. State Farm contended that production of these documents constitutes improper, premature bad faith discovery. The Florida court of appeal, in State Farm Florida Insurance Company v. Meir Aloni, As Personal Representative of the Estate of Sonja, No. 4D11-4798 (Fla.App. 11/28/2012) resolved the dispute.

FACTS

The underlying action involves a property insurance coverage dispute. Meir Aloni, as personal representative of the Estate of Sonja Aloni, sued State Farm to recover for roof damage to a residence allegedly caused by Hurricane Wilma. Aloni alleged that he discovered damage to the roof around February 26, 2010, and immediately notified the insurer.

In his first request for production, Request #2, Aloni asked for State Farm’s “complete ‘Claims File.'” State Farm produced a number of documents, but objected to Request #2, asserting that this was protected work product and attorney-client privileged material, and that the request seeks proprietary information that is not relevant nor likely to lead to the discovery of admissible evidence. State Farm also objected that this request was vague and overbroad. It produced portions of the claim file for which any privilege was already waived and filed a privilege log for the remaining documents.

Aloni moved to compel production. He argued that State Farm was improperly withholding documents that were created before the denial of his claim and not in anticipation of litigation. He further argued that work product protection does not attach to portions of the claim file generated in the ordinary scope of the insurer’s business. State Farm responded that whether the policy covers the claim is a disputed issue because Aloni did not report the damage until approximately four-and-a-half-years after the hurricane, and that while the coverage issue is pending, the claims file is not discoverable.

ISSUES

State Farm also relied on an affidavit from its litigation specialist, who stated that because the deceased policy holder and her representative, Aloni, did not report the claim until years after the hurricane, State Farm sent Aloni a reservation of rights letter twelve days after receiving notice of the claim to inform him that it would investigate the claim. The affidavit stated that the log notes were prepared after the insurer received notice of the claim, and that the notes contain personal thoughts, evaluations, mental impressions, and recommendations regarding the claim and the possibility of litigation. The affidavit stated that the insurer did not intend the notes to be discoverable by third parties, only litigation counsel; the notes were prepared in contemplation of litigation because the late reported claim was a foreseeable basis for litigation. The affidavit further stated that the log notes include directives to counsel regarding the handling of litigation.

At a hearing on the motion to compel, Aloni asserted that the activity log notes (from the time the claim was made on April 14, 2010 to service of the lawsuit on December 17, 2010), internal emails, and photographs were not protected work product. Aloni argued that in this case the possibility of litigation was not substantial and imminent until State Farm learned of the suit. Aloni also contended that the claim file materials were relevant based on State Farm’s position that the claim was not timely reported. According to Aloni, this gave rise to a presumption of prejudice that Aloni had to overcome.

Following the hearing, the court conducted an in camera inspection. It then granted the motion to compel in part, ordering production of the activity log notes from April 14, 2010 to December 17, 2010, internal emails, and photographs. State Farm was ordered to file the documents under seal. The trial court denied State Farm’s motion for rehearing, but granted a stay pending resolution of the petition to the court of appeal.

State Farm argues that the trial court’s order departs from the essential requirements of law by allowing premature bad faith discovery in a coverage dispute. It cites Florida case law addressing the protected nature of claim file materials in actions where the coverage issue has not yet been determined.

State Farm argued that production of claim file material at this stage in the litigation will cause irreparable harm. State Farm stressed that the requested discovery is irrelevant to the coverage dispute.

The personal representative of the insured’s estate argues that the claim file materials ordered for production are relevant to the issue of whether the insurer was prejudiced by the untimely reporting of the claim.

ANALYSIS

Generally, an insurer’s claim file constitutes work product and is protected from discovery prior to a determination of coverage.

In this case, where the coverage issue is in dispute and has not been resolved, the trial court departed from the essential requirements of the law in compelling disclosure of State Farm’s claim file materials without the requesting party proving need and the inability to obtain the substantial equivalent of this material without undue hardship. Because State Farm has shown that such disclosure would result in irreparable harm that cannot be adequately addressed on appeal, we grant the petition and quash the discovery order.

ZALMA OPINION

The plaintiffs in this case should be ashamed by bringing a claim against an insurer for property damage more than four years after the loss. Since the hurricane that caused the damage Florida has seen multiple tropical rain storms and a hurricane or two. Damage caused by the original loss would, in normal course, have been increased and the ability of the insurer to assist its insured to prevent further damage would have been eliminated.

There is no question that an experienced claims person seeing a loss report more than four years after the alleged loss would have reserved rights to fully investigate, would presume a high possibility of a claim denial, and that – as a result – the insured would probably file suit. The court of appeal agreed with State Farm and concluded that the discovery of the information and investigation done in anticipation of litigation is protected work product.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

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Damages

Failure to Prove Damages Defeats Bad Faith Claim

When presenting a claim to an insurance company the person insured is obligated to prove to the insurer the loss was caused by a peril insured against, and the value of the property lost. Texas Farm Bureau Mutual Insurance Company (Texas Farm) appealed from a judgment awarding Joseph Wilde damages, lost profits, and attorney’s fees resulting from a jury verdict that Texas Farm committed unfair or deceptive settlement practices under the Texas Insurance Code. In Texas Farm Bureau Mutual v. Joseph Wilde, No. 08-11-00150-CV (Tex.App. Dist.8 11/30/2012) the Texas Court of Appeal was asked to reverse the trial court decision because Wilde failed to present evidence of the value of his property and rather than elect remedies sought – and received – both remedies in violation of the law of Texas.

BACKGROUND

Wilde had a policy of insurance with Texas Farm which insured Wilde’s 1999 John Deere 7455 cotton stripper for a maximum value of $90,000. Wilde filed a claim on the policy after the cotton stripper caught fire on December 16, 2005, and was “completely destroyed.” After Texas Farm denied Wilde’s claim, Wilde filed suit for breach of contract, breach of duty of good faith and fair dealing, and unfair settlement practices under the Texas Insurance Code, and sought to recover damages for the market value of the cotton stripper, lost profits, attorney’s fees, and treble damages.

The case initially proceeded to trial in 2010 and the trial court denied Texas Farm’s no-evidence and traditional summary judgment motions. Thereafter, the trial court granted Texas Farm’s motion for mistrial. The case was tried in 2011 and, prior to submission of the case to the jury, the trial court denied Texas Farm’s motion for an instructed verdict on lost profits and attorney’s fees. The trial court also overruled Texas Farm’s objections to the submission of market damages, lost profits, and attorney’s fees in the jury charge.

The jury returned a verdict in favor of Wilde, found that Texas Farm knowingly engaged in an unfair or deceptive act or practice that caused damage to Wilde, and found market-value damages in the amount of $75,000, lost profits in the amount of $60,000, and attorney’s fees in the amount of $30,000.

Before entry of the judgment, the trial court denied Texas Farm’s motion for judgment notwithstanding the verdict as to the jury’s award of the three damage elements. The trial court entered judgment in accordance with the jury’s verdict.

DISCUSSION

In five issues, Texas Farm contends the trial court erred in awarding $75,000 damages for diminution in market value, $60,000 lost profits, and $30,000 in attorney’s fees to Wilde in accordance with the jury’s verdict.

Market Value – Salvage Value

Texas Farm complained that the trial court erred in awarding market-value damages because no evidence of the market value of the cotton stripper immediately after the fire was presented at trial. The appellate court recognized that while seeking to recover damages for the loss or reduction of personal property’s value, market value is the typical method of valuation. Market value, in Texas, and elsewhere is defined as “the price property would bring when it is offered for sale by one who desires, but is not obligated to sell, and is bought by one who is under no necessity of buying it.” The market value of damaged or destroyed personal property is the difference in the property’s market value immediately before and immediately after the injury at the place where the damage occurred.

Wilde contended that the cotton stripper was totally destroyed by fire. Texas Farm asserts that the evidence at trial showed the cotton stripper was a total loss and Wilde was required, but failed, to prove the cotton stripper’s post-loss value in the form of its salvage value. Although evidence at trial showed the cotton stripper’s purchase price, its low “hours” of use, a lack of damage to the engine, and that the cotton stripper had salvage value in general, Wilde presented no evidence of the cotton stripper’s immediate post-fire market value in Reagan County.

Because Texas Farm proved the complete absence of a vital fact at trial essential to the determination of market value, the appellate court concluded that Texas Farm’s legal-sufficiency challenge must be sustained. Because no evidence existed to support the submission of an award of market-value damages to the jury, the appellate court concluded that the trial court erred in overruling Texas Farm’s objections to the jury charge on market value, its motion for judgment notwithstanding the verdict, and awarding market-value damages.

Lost Profits

Texas Farm also claimed that because Wilde sought to recover the market value of the destroyed cotton stripper, Wilde was not entitled to also recover the loss of its use or lost profits.

Typically, when personal property has been damaged, an injured plaintiff can recover the market value of the property. Loss-of-use damages are permitted where cost-of-repair damages are sought. A plaintiff may also be entitled to recover loss-of-use damages in the form of lost profits if he loses the opportunity to accrue earnings from the use of the damaged equipment.

A plaintiff, like Wilde, whose property is totally destroyed is not entitled to the election of remedies.  Rather, a plaintiff whose property is totally destroyed is limited to seeking the proper measure of market-value damages.

Wilde sought to recover and was awarded both market-value damages for the cotton stripper as well as lost profits. Because Wilde was limited to seeking only market-value damages for his burned cotton stripper, the award of lost-profit damages constitutes an impermissible double recovery.  The appellate court concluded that, as a result, the trial court erred when it permitted the jury to consider and determine lost-profit damages.

Attorney’s Fees

In Issue Five, Texas Farm contended the evidence is factually and legally insufficient to support the award of attorney’s fees. The appellate court concluded that it had no need to address the sufficiency of the evidence to support an award of attorney’s fees.

It has long been the American Rule that each party pays its own lawyers. Recovery of attorney’s fees is permitted only when authorized by statute, a contract between litigating parties, or under equity. To recover attorney’s fees under state statutes a plaintiff must prevail on a breach-of-contract claim and recover some damages.

Because the jury found that Texas Farm knowingly engaged in a deceptive or unfair settlement practice, the court was tempted to initially consider Wilde to be a prevailing plaintiff. However, whether a party prevails turns on whether the party prevails upon the court to award it something, either monetary or equitable. A party that recovers no damages, secures no declaratory or injunctive relief, obtains no consent decree or settlement in its favor, receives none of the relief sought in its petition, and receives nothing of value of any kind enjoys no benefit of “prevailing party” status for a stand-alone breach-of-contract finding, and should not recover attorney’s fees.

Because the award of market-value and lost-profit damages was reversed, and because Wilde has not obtained any of the specified relief that would permit a different outcome, Wilde received nothing of value, is not a prevailing party, and is not entitled to recover attorney’s fees.

ZALMA OPINION

Sometimes, as in this case, having a friendly judge who rules in favor of the plaintiff on each and every motion results in a favorable jury verdict only to find the verdict overturned because the friendly judge made it unnecessary to do everything necessary to properly prove a loss. The jury did not like the way the Texas Farm treated Wilde. They found it treated him badly. They punished Texas Farm by awarding damages to which Wilde was not entitled and as a result he received nothing.

The lesson learned is no matter how friendly the judge to your position never overreach, never seek double damages, never seek damages to which the plaintiff is not entitled, and always present sufficient evidence to prove the case. If not you may find yourself slapped by the appellate court and walk away with nothing more than a piece of worthless paper.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

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The Importance of the Waiver of Subrogation

How to Avoid Litigation

A waiver of subrogation is useful in construction contracts because it avoids disrupting the project and eliminates the need for lawsuits. The contract price can be reduced by an agreement between the owner and the builder that the insurance in effect for the owner should be the sole source of recovery when a loss occurs. Applying the waiver to all losses covered by the owner’s property insurance policy eliminates litigation over liability issues and whether the claimed loss was damage to the Work or non-Work property.

The Iowa Court of Appeal was required to resolve a dispute between a subrogating insurer and three contractors over the right of subrogation in Federal Insurance Company, As Subrogee of Buena Vista County Hospital v. Woodruff Construction, et al, No. 2-946 / 12-0821 (Iowa App. 11/29/2012). Federal Insurance Company (Federal) appealed from the trial court’s grant of summary judgment in favor of several contractors in its subrogation suit. Federal believed the waiver did not apply.

Background

Buena Vista County Hospital (hospital) contracted with Woodruff Construction (Woodruff) to make certain improvements in the hospital, including a new operating suite and related support rooms. Woodruff subcontracted portions of the work to three other contractors. During construction a sprinkler in the mechanical support room for the new operating room activated, resulting in extensive water damage. The water damaged some of the construction project and also damaged the contents of a storage room unrelated to the construction.  The parties agreed that ninety percent of the damages related to the cost of replacing the contents of the storage room.

Federal, the hospital’s property insurance provider, paid the hospital for all of its damages, then, as subrogee of the hospital, sued the contractors to recover the amount paid to the hospital. The contractors moved for summary judgment, contending the hospital waived subrogation rights against the contractors in the contract between the hospital and Woodruff. The trial court granted summary judgment in favor of the contractors, ruling the hospital waived any right of recovery against the contractors to the extent damages were covered by insurance.

Issue

The Court was asked to determine if the waiver language in the construction contract applied only to damages to “the Work” or to any damages covered by insurance applicable to the Work? Section 11.4.7 describes the waiver, as follows:

The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architects’ consultants, separate contractors described in article 6, if any, and any of their subcontractors, sub-subcontractors, agents and employees, for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to this Section 11.4 or other property insurance applicable to the Work, except such rights as they shall have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect’s consultants, separate contractors described in Article 6, if any, and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.

Federal contends the waiver extends only to damages to “the Work,” which all agree refers to the construction project. The contractors contend the waiver extends to any damages covered by insurance provided “pursuant to this Section 11.4 or other property insurance applicable to the Work.”

Trial Court Decision

The district court, after examining sections the AIA form construction contract ruled:

“[T]he question becomes whether the damages now claimed were ‘caused by . . . causes of loss to the extent covered by property insurance’ issued by Federal. The alternate question is whether the claim is for damages caused by ‘causes of loss covered by other property insurance applicable to the work.’

“This is clearly the case here. . . . [T]he scope of the subrogation waiver is not defined by what property got damaged.

“The scope of the subrogation waiver is defined by the extent of coverage of property insurance applicable, whether it insures the work or not, so long as it was ‘retained or maintained’ pursuant to paragraph 11.4 or is ‘other property insurance applicable to the work.’ Thus, the scope of subrogation waiver is defined by the scope of coverage. Here, the scope of coverage was broad enough to cover both work and non-work property.”

Analysis

The provisions of section 11.4 in the contract are standard boilerplate provisions concerning property insurance from the American Institute of Architects (AIA) Document A201. Courts in many jurisdictions have addressed contract language identical or nearly identical to the provisions at issue here. All agree the language such as found in section 11.4.7 waives any claim the property owner or its insurance company as subrogee might have against contractors “for damages caused by fire or other causes of loss.”

The majority of courts limit the waiver to the proceeds of the “property insurance obtained pursuant to [the contract] or other property insurance applicable to the Work.” These courts make no distinction between damages to “work” and “non-work” property. Instead, they consider whether the insurance policy was broad enough to cover damages to work and non-work property and whether the policy paid for the damages. If the answer to both questions is yes, the waiver applies.

The minority of courts ask only whether the damage was to the “work.” If so, the waiver applies; if not, the waiver does not apply. Federal’s arguments sought to convince the Court of Appeal to adopt the minority approach.

Contrary to Federal’s desire, the Iowa Court of Appeal found that the majority approach comports better with all the contract language, the policies underlying the waiver, and Iowa law and adopted the majority approach. It concluded the trial court correctly outlined the gist of the language in the AIA form contract, noting the hospital and Woodruff agreed:

  1. To waive all rights
  2. Against each other
  3. For damages caused by fire or other causes of loss, to the extent covered by
    1. Property insurance obtained pursuant to this Section 11.4, or
    2. Other property insurance applicable to the work.

Decision

The Federal policy was existing property insurance, not a specific policy “obtained pursuant to this Section 11.4.” Federal’s general property insurance policy, therefore, was “other property insurance applicable to the work.” The damages sustained by the hospital caused by the sprinkler head activation were caused by “other causes of loss.” They were entirely covered by the Federal’s general property insurance policy, less a deductible amount. Thus, according to the plain, unambiguous language of section 11.4.7, the hospital and Woodruff agreed to waive all rights against each other for damages “to the extent covered” by Federal’s “property insurance applicable to the work.”  As written, the waiver looks to whether the loss was covered by insurance, not whether the loss was to “the work.”

It is a fundamental and well-settled rule that when a contract is not ambiguous, a court must simply interpret it as written and give effect to the language of the entire contract according to its commonly accepted and ordinary meaning.

The Court of Appeal concluded the district court committed no error in construing the contract language, the policies underlying the waiver, and Iowa law and that Federal had no right because its insured waived its right to subrogate.

ZALMA OPINION

Most, but not all, commercial insurance policies allow an insured to waive subrogation if it does so before a loss. Some allow waiver to certain described classes of people after a loss. Almost every AIA based construction contracts contain a broad waiver of subrogation like that described in this case. If the owner’s property insurance allows waiver there is no problem. If it does not, and the owner waives subrogation, it can find itself without insurance coverage for simple, run-of-the-mill breach of contract.

Every person must read contracts they enter into. Every insurance agent and broker must be certain that their insured’s obtain a policy that allows for waiver of subrogation.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

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Collateral Estoppel Defeats Claim

No Coverage for Willful Sexual Harassment

A very wealthy serial sexual abuser sought insurance coverage for his actions when charged by one of his victims. The insurer concluded that there was no coverage available to the abuser because of an exclusion for willful abuse and because the issue was resolved in an arbitration (later reduced to judgment) between the abuser and his then employer.

The First Circuit Court of Appeal was called upon to resolve an insurance coverage dispute that arose from charges of sexual harassment brought by a one-time employee against appellant Luciano Manganella, the former president of Jasmine Company, Inc. In Luciano Manganella v. Evanston Insurance Company, No. 12-1137 (1st Cir. 11/27/2012) Manganella sought a defense to and indemnity for the harassment claims from Evanston Insurance Co., Jasmine’s liability insurance provider. The district court ruled that Manganella was not entitled to coverage from Evanston because, under the doctrine of issue preclusion, a prior arbitration between Manganella and the purchaser of his business conclusively established that Manganella’s conduct fell within an exclusion to Evanston’s insurance policy.

Facts & Background

Manganella was the president and sole shareholder of Jasmine, a clothing retailer that he founded in the 1970s. Donna Burgess, whose sexual harassment allegations against Manganella form the underlying claims here, was Jasmine’s human resources manager from 1997 to 2006.

In 1998, a former Jasmine employee, Sonia Bawa, filed claims of sexual harassment against Jasmine based on Manganella’s conduct. Soon thereafter, Jasmine purchased from Evanston the Employment Practices Liability Insurance Policy at issue here (the “Policy”). Jasmine’s coverage from Evanston under the Policy consisted of a series of annually renewed one-year installments. The Policy covered any “claim” that sought relief for a Wrongful Employment Practice and is made and reported to Evanston during the policy period or an extended reporting period.  A Wrongful Employment Practice includes, as defined in the policy was, “conduct of an Insured with respect to . . . [an] employee that allegedly culminated in . . . violation of any state, federal or local civil rights or anti-discrimination law and/or fair employment practices law.”  (Emphasis added)

The Policy also excluded by the “Disregard Exclusion” coverage for claims based on “conduct . . . committed with wanton, willful, reckless or intentional disregard of any law or laws that is or are the foundation for the Claim.” (Empahsis added)

In July 2005, Manganella sold Jasmine to Lerner New York, Inc. for approximately $30 million. Manganella and Lerner executed a stock purchase agreement (“SPA”) to effectuate the sale and an employment agreement under which Manganella would remain Jasmine’s president for three years. Under the SPA, $7 million of the purchase price was placed in escrow, “as security . . . in the event of a Major Employment Breach” by Manganella.

In May 2006, further allegations of sexual harassment by Manganella prompted Jasmine to hire an outside investigator, Stier Anderson LLC, which interviewed several employees, including Burgess; she recounted inappropriate comments that Manganella had made in the past. On June 22, 2006, as a result of conduct revealed by the investigation, Manganella was fired. In a letter to Manganella, Lerner accused him of committing multiple Major Employment Breaches by sexually harassing four female employees and downloading sexually explicit images on company computers, all in violation of Lerner’s Code of Conduct. Lerner demanded that Manganella agree to release the escrowed $7 million.

Lerner invoked the SPA’s arbitration clause and after days of hearing the panel issued its ruling finding that Manganella had “sexually propositioned several women employees and inappropriately touched and propositioned one of these employees,” in willful violation of Lerner’s corporate Code of Conduct. The panel explained: “We find, despite his protestations to the contrary, that [Manganella] was well acquainted with the Company’s policy on sexual harassment and other acts of inappropriate conduct. We find thus that he did not comply with the policy and that his refusal was willful.”

Roughly a month before the arbitration ended Burgess filed a charge of discrimination against Manganella, Lerner, and Jasmine with the Massachusetts Commission Against Discrimination (“MCAD”).

Ten days after Burgess filed the MCAD charge, Manganella notified Evanston of her claims and requested coverage under the Policy. Evanston replied, denying coverage for Burgess’s claims on the ground that it was “apparent” that the harassment alleged in her MCAD charge “did not happen in its entirety subsequent to the … Retroactive Date,” as required for coverage. Evanston’s letter also relied upon, without elaboration, the Disregard Exclusion.

Manganella sued Evanston seeking a ruling that Evanston was required under the Policy to defend and indemnify him against Burgess’s MCAD charge. He also alleged breaches of contract, breach of the duty of good faith and fair dealing, and violations of Massachusetts statutes stemming from Evanston’s refusal to defend and indemnify him. Both parties moved for summary judgment.

Analysis

The appeal was limited to whether the district court properly applied the doctrine of issue preclusion to bar Manganella from litigating whether the Policy’s Disregard Exclusion applies to the conduct alleged in Burgess’s MCAD charge. The district court held that the arbitration between Lerner and Manganella had decided, in the affirmative, the crucial question of whether Manganella’s acts, as alleged by Burgess, were committed with wanton, willful, reckless, or intentional disregard for the Massachusetts sexual harassment law that formed the basis for her claims against him.

Issue preclusion (called collateral estoppel in most jurisdictions) prevents a party from relitigating issues that have been previously adjudicated. Under modern preclusion doctrine, the central question is whether a party has had a full and fair opportunity for judicial resolution of the same issue.

Final arbitration awards affirmed by a court are generally afforded the same preclusive effects as are prior court judgments. Under those traditional requirements, issue preclusion may be applied to bar relitigation of an issue decided in an earlier action where:

(1)     the issues raised in the two actions are the same;

(2)     the issue was actually litigated in the earlier action;

(3)     the issue was determined by a valid and binding final judgment; and

(4)     the determination of the issue was necessary to that judgment.

Collateral Estoppel Does Not Require Identical Issues

For issue preclusion to apply to the insurance dispute, the arbitrators must have decided an issue the same as the one presented in the insurance dispute. The identity of the issues need not be absolute; rather, it is enough that the issues are in substance identical. Further, the issue need not have been the ultimate issue decided by the arbitration; issue preclusion can extend to necessary intermediate findings.

In fact both the state law and the Lerner rules of conduct prohibit “sexual advances,” “requests for sexual favors,” and other “verbal” or “physical” “conduct of a sexual nature.”

The First Circuit concluded that the arbitrators effectively decided the issue presented to them. The arbitration award found a willful violation of the Lerner Code and the proof submitted to the arbitrators showed that Manganella’s conduct was committed in disregard of the law. The law and Lerner’s code were effectively the same. The arbitration sufficiently established that Manganella was “quite familiar with the subject of sexual harassment,” having in 1998 updated Jasmine’s company policy to reflect the same Massachusetts sexual harassment law that was the basis of Burgess’s claims against him.

At the arbitration Manganella vigorously litigated both the truth of those allegations and the question of whether he knew that his behavior was prohibited.

The arbitrators’ determination that Manganella sexually harassed his employees in willful violation of the Code was necessary to the actual decision reached by the arbitrators.

The arbitration presented Manganella with the “full and fair opportunity” for adjudication of the issue at hand that is the centerpiece of modern issue preclusion doctrine. The extent of his harassing conduct and his knowledge that it was prohibited were vigorously litigated and were essential to the arbitration panel’s judgment. Allowing Manganella to contest these questions in the dispute with the insurer would contravene the twin goals of issue preclusion: protecting litigants from the burden of relitigating settled issues and promoting judicial economy by preventing needless litigation.

ZALMA OPINION

Manganella, in both the arbitration and the suit against Evanston, the insurer, is a definition of “Chutzpah” (unmitigated gall). Not only did he abuse his female employees as a matter of course, he managed to acquire $30 million by selling the business and staying on – with a promise of good behavior – as president of the company. He was fired when he continued his acts of harassment and abuse. He litigated the firing and lost because the arbitrators found he had acted willfully in violation of the law and the contract.

Then, after losing once, he attempted to argue the same facts in an insurance dispute. The court properly found that the doctrine of preclusion or collateral estoppel prevented the relitigation of the same issue. He is required to defend the case out of the $30 million he received from the sale.

Insurers faced with similar issues should take heed and, if the facts warrant, assert collateral estoppel as a defense.

 

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

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Report Loss Promptly or Lose Coverage

Insured Who Hid Facts of Loss From Insurer Loses

The Duty of Utmost Good Faith

Insurance is a business of utmost good faith at the time the insurance is acquired, at all times the policy is in effect and during the claims process. Many believe, incorrectly, that the obligation to act in good faith is a one way street that only applies to an insurer in its contact with the insured but applies equally to the insured in its contact with the insurer. The insured is required by the implied covenant of good faith and fair dealing to advise its insurers of all facts that might be material to the decision of the insurer to exercise its right to determine whether it desires to insure risks of loss. A reasonably prudent business, knowing that it faced serious expense in cleaning up pollution, would advise its insurer of the existence of such a risk before applying for insurance. In Wisconsin an insured did not advise its insurers of the existence of the risk it knew existed before the policies came into effect.

Between October 1969 and February 1980, Certain Underwriters at Lloyd’s & London Market Insurance Companies (“Lloyd’s”) supplied Ansul, Inc. and Tyco International (US), Inc. (“Ansul”) with nine excess policies with varying coverage dates. From the 1950s to 1977, Ansul caused severe environmental damage by contaminating groundwater near the Menominee River with substantial quantities of arsenic. At no time between the 1950’s and 1977 did Ansul advise its insurers of the existence of the environmental damage it knew it had caused. The Wisconsin Department of Natural Resources (“DNR”) became involved in the early 1970s, and in 1981 ordered Ansul to construct a groundwater treatment system that operated until 1986, at a cost of over $11 million. In 1990, the federal Environmental Protection Agency (“EPA”) determined that significant quantities of arsenic remained, and ultimately ordered Ansul to conduct further remediation.

Ansul, for the first time, notified Lloyd’s of the contamination or government-ordered remediation in 1997. It did so only by filing a declaratory action against Lloyd’s in New Hampshire. Ansul later commenced similar actions in Wisconsin, which were consolidated and ultimately dismissed on summary judgment. The circuit court concluded Ansul was not entitled to coverage because it had breached the notice and cooperation clauses of the pertinent policies. Ansul asked the Court of Appeal to reverse the trial court in Ansul, Inc. and Tyco International (Us), Inc v. Employers Insurance Company of Wausau, No. 2011AP2596 (Wis.App. 11/27/2012) contending that the insurers were not prejudiced by its delay.

BACKGROUND

Between 1957 and 1977, Ansul produced agricultural herbicides containing both organic and inorganic arsenic. From 1957 until the early 1960s, waste arsenic salt was discharged directly into the Menominee River. Ansul also stored salt in unlined waste piles that were not covered until 1973. In 1967, Ansul transferred most of the existing waste salt, and newly produced salt, to a polyethylene-lined concrete storage vault. The vault developed cracks and the liner ruptured. By 1977, Ansul was storing approximately 95,000 tons of arsenic salt in the vault and in various other locations at its Marinette site.

The DNR became involved with the arsenic salt problem in 1971. In 1973, it issued a consent order to Ansul. The DNR found the waste salt was a toxic or hazardous solid waste under Wisconsin law and required “special storage, handling, and disposal.” It found that the vault, which was uncovered and exposed, was not satisfactory, as the DNR suspected that it was leaking and feared that the vault was in danger of collapse from the 37,500 tons of salt piled ten feet above its side walls. The DNR also noted that some salt had been stored outside the vault on a loading dock within ten feet of the Menominee River. Ansul representatives met with officials from the DNR and Wisconsin Attorney General’s office in 1974. According to a memo from this meeting, an analysis of groundwater samples indicated “that Ansul has severely contaminated the local groundwaters with organic and inorganic arsenic, in violation of state laws.”

By 1990, Ansul had established a $5 million reserve to deal with on-site environmental problems. That year, the EPA found that significant quantities of arsenic remained under and adjacent to Ansul’s facility. Pursuant to a consent order, Ansul was required to conduct a facility investigation and a corrective measures study, and submit bi-monthly reports to the EPA and DNR. According to a 1991 internal memorandum, Ansul estimated the cost of cleanup alone at “somewhere between $8 million and $15 million.”

After additional studies, the EPA ordered Ansul to remediate contaminated areas. Ansul estimates it has spent over $46 million on remediation, with an additional $16 to $30 million in future costs likely.

The Excess Insurance Policies

Between October 1969 and February 1980, Ansul maintained nine separate excess liability policies with Lloyd’s. These policies had varying attachment points and dates of coverage. According to a 1990 internal memorandum, Ansul was advised by its brokers not to give notice of the environmental issues because the insurers would likely deny liability and increase Ansul’s premiums. Nonetheless, in 1991, Ansul began notifying its insurers – but not Lloyd’s – that it may be liable for waste investigation and cleanup under state and federal law.

The Litigation

In 1997, Ansul commenced a declaratory action in New Hampshire against Lloyd’s. Lloyd’s received notice of the service of process on December 22, 1997. This was the first notice of Ansul’s claim regarding the Marinette site that Lloyd’s received.

Ansul commenced the present action in Marinette County in 2004 against Lloyd’s and other insurers. Lloyd’s filed a motion for summary judgment, which the circuit court granted. The court concluded that, despite years of negotiation, investigation, and remediation with the DNR and the EPA, Ansul failed to timely notify Lloyd’s of its potential liability. It also determined Ansul breached the policies’ “Assistance and Cooperation” clauses by immediately putting Lloyd’s in an adversarial position by suing them.

DISCUSSION

Each policy contained provisions relating to notice and cooperation.

It is undisputed that, as of 1991, Ansul had spent in excess of $11 million on site investigation and remediation and had established a $5 million reserve to fund future cleanup expenses, which it estimated at somewhere between $8 million and $15 million. Thus, by 1991 at the latest, Ansul should have known its liability for the contamination at the Menominee River site was likely to reach the attachment point for at least one of the policies.  Nonetheless, it waited six years to notify Lloyd’s of the claim, well after its other insurers had been notified. The Court of Appeal concluded that this constitutes unreasonable delay.

Lloyd’s emphasized that Ansul employees and representatives were unable to explain why Ansul did not notify the insurer sooner. Presumably, these witnesses either did not know or did not wish to reveal the undisputedly intentional nature of the omission especially because of the advice of the broker which was followed in part and not followed in part.

In Wisconsin, a delay of as little as thirteen days, without explanation, can be unreasonable. Other cases found unreasonable unexplained delays of three years, one year, and three months, as a matter of law.

Ansul argued no prejudice. Prejudice to the insurer in this context is a serious impairment of the insurer’s ability to investigate, evaluate, or settle a claim, determine coverage, or present an effective defense, resulting from the unexcused failure of the insured to provide timely notice. Whether an insurer has been prejudiced is governed by the facts and circumstances in each case.
The purpose of insurance notice requirements exists so an insurer can fulfill its need for an opportunity to investigate possible claims against the policy or its insured while the witnesses are available and their memories are fresh. An insurer cannot make a reasoned judgment as to its contractual obligations until it has had the opportunity to examine and review the factual situation, and this investigation cannot commence until the insured has fulfilled its duty to provide notice.

At least by 1986 – and likely much earlier as to several of the excess policies – Ansul’s expenditures had exceeded the attachment point for all policies except one. Ansul’s notice for these policies was at least eleven years late. With respect to the last policy Ansul’s notice was at least six years late.

The cooperation clauses at issue in this case unambiguously required Ansul to provide Lloyd’s with an opportunity to associate with it and the underlying insurers in the control of any claim or proceeding reasonably likely to involve the policies. Tellingly, Ansul does not claim it has not breached the cooperation clauses. In adopting an adversarial position from the outset, Ansul deprived Lloyd’s of the opportunity to associate with the Assured or the Assured’s underlying insurers, or both, in the defense of any claim, suit or proceeding. The lengthy delay in notice becomes all the more prejudicial because once the insured brings a coverage suit, the duty of cooperation may be circumscribed by the adversary process.

It is apparent that by unnecessarily delaying notice and then immediately commencing a lawsuit, Ansul deprived Lloyd’s of any ability to investigate the scope of, or basis for, Ansul’s liability outside the adversary process. Ansul, with full knowledge of the underlying facts, had years in which to mitigate any potential coverage defenses available to Lloyd’s, like the known loss doctrine or pollution exclusions found in some of the excess policies. Cooperation provisions are designed precisely to prevent fraud.

ZALMA OPINION

Ansul knew about its environmental problems before it bought its first policy from Lloyd’s concealed that information over multiple renewals of the insurance. When it finally decided to report the claim, by filing suit, Ansul was decades late.

This suit should never have been filed. Ansul made a corporate decision to not report a loss to its insurers since it expected the claim to be denied and its premium to be raised. It knew that no insurer would agree to insure the pollution exposure if it knew that it was in the process of contaminating the ground water with arsenic and was in the process of attempting to clean it up after admitting responsibility. What it did was wait as long as possible, after evidence had been lost or disposed of, and then made a claim contending the insurers were not prejudiced. To make such a claim was evidence of unmitigated gall.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

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State Can Rewrite Policy

Statute Changing Policy May Not Apply Retrospectively

The Supreme Court of South Carolina was asked by Harleysville Mutual Insurance Company (Petitioner) to assess constitutional challenges to Act No. 26 of the South Carolina Acts and Joint Resolutions which regulates coverage provided by commercial general liability (CGL) insurance policies for construction-related work. In Harleysville Mutual Insurance Company v. the State of South Carolina; the South Carolina Department of Insurance; David Black, In His Official Capacity As Director of the, No. 27189 (S.C. 11/21/2012) the court, over a strenuous dissent, found the statute to be valid but its retrospective effect is unconstitutional.

FACTS

On January 7, 2011, this Court issued an initial opinion in Crossmann Communities of North Carolina, Inc. v. Harleysville Mutual Insurance Company, Op. No. 26909 (S.C. Sup. Ct. filed Jan. 7, 2011) (Crossmann I), wherein it addressed the definition of “occurrence” in a CGL policy.

In Crossman I, the Court held where “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions,” the term is unambiguous and retains its inherent fortuity requirement.  Based on this determination, this Court found that Respondents Crossmann Communities of North Carolina, Inc. and Beazer Homes Investment Corporation (collectively Crossmann) were not entitled to coverage under Petitioner’s CGL policy for claims arising out of damage to condominiums caused by faulty workmanship.

Specifically, this Court reasoned that because “the damage to the insured’s property [was] no more than the natural and probable consequences of faulty workmanship,” there was “no fortuity element present under this factual scenario.” The Court elaborated that, “[f]or faulty workmanship to give rise to potential coverage, the faulty workmanship must result in an occurrence, that is, an unintended, unforeseen, fortuitous, or injurious event.” In so ruling, the Supreme Court overruled its earlier decision in Auto-Owners Insurance Company v. Newman, 385 S.C. 187, 684 S.E.2d 541 (2009), on the ground that the Newman opinion “permitted coverage for faulty workmanship that directly causes further damage to property in the absence of an ‘occurrence’ with its fortuity underpinnings.”

On January 26, 2011, the General Assembly introduced Senate Bill 431, which was subsequently passed as Act No. 26 of the South Carolina Acts and Joint Resolutions and ratified on May 17, 2011 upon the Governor’s signature that provided:

“(B) Commercial general liability insurance policies shall contain or be deemed to contain a definition of “occurrence” that includes:
“(1) an accident, including continuous or repeated exposure to substantially the same general harmful conditions; and
“(2) property damage or bodily injury resulting from faulty workmanship, exclusive of the faulty workmanship itself.
“(E) This section applies to any pending or future dispute over coverage that would otherwise be affected by this section as to all commercial general liability insurance policies issued in the past, currently in existence, or issued in the future. [S.C. Code Ann. § 38-61-70 (Supp. 2011).]

On August 22, 2011, the Supreme Court changed its initial position in Crossmann I and found in favor of coverage based on an “occurrence.” See Crossmann Cmtys. of N.C., Inc. v. Harleysville Mut. Ins. Co., 395 S.C. 40, 717 S.E.2d 589 (2011) (Crossmann II). In doing so, the Court reaffirmed its decision in Newman and clarified that “negligent or defective construction resulting in damage to otherwise non-defective components may constitute ‘property damage,’ but defective construction would not.”  The Court further found that, “the expanded definition of ‘occurrence’ is ambiguous and must be construed in favor of the insured, and the facts of the instant case trigger the insuring language of Harleysville’s policies.”

ISSUES

I. Whether Act No. 26 of the South Carolina Acts and Joint Resolutions unconstitutionally violates the separation of power doctrine.

II. Whether Act No. 26 of the South Carolina Acts and Joint Resolutions is unconstitutional special legislation or deprives Petitioner of equal protection under the law.

III. Whether the retroactive application of Act No. 26 of the South Carolina Acts and Joint Resolutions unconstitutionally violates the state and federal Contract Clauses.

ANALYSIS

Petitioner implored the Supreme Court to “strike down” Act No. 26 on the ground the General Assembly was without authority to create legislation which attempts to overturn and directly control this Court’s ultimate decision in Crossmann II. Petitioner contends that in adopting the current version of Act No. 26, the General Assembly violated the doctrine of separation of powers.

The doctrine of separation of powers is succinctly stated in the South Carolina constitution:

In the government of this State, the legislative, executive, and judicial powers of the government shall be forever separate and distinct from each other, and no person or persons exercising the functions of one of said departments shall assume or discharge the duties of any other. S.C. Const. art. I, § 8. The operational effect of this doctrine is to prevent one branch of government from usurping the power and authority of another.

The Supreme Court of South Carolina concluded that the General Assembly did not violate the doctrine of separation of powers by enacting Act No. 26.  As evidenced by the procedural and legislative history, it is clear the General Assembly wrote and ratified Act No. 26 in direct response to this Court’s decision in Crossmann I.  Had Crossmann I been this Court’s final opinion, the doctrine might have been implicated.  However, given that in Crossmann II we revised our initial decision in Crossman I, we do not find that the General Assembly, in this instance, retroactively overruled this Court’s interpretation of a statute.

Harleysville asked the Court to invalidate Act No. 26 as “special legislation” because it “is narrowly drafted to favor only a small section of one particular industry.” Specifically, it claimed Act No. 26 expands coverage for “construction professionals” performing “construction related work” under a CGL insurance policy, “but would not provide the same for a non-construction professional under an identical CGL insurance contract.”

In a related argument, Harleysville asserts that Act No. 26 violates the Equal Protection Clause by “classifying and treating issuers of CGL policies differently than issuers of other types of insurance policies that make an ‘occurrence’ a prerequisite to coverage.” Additionally, it argues that the “newly imposed definition of ‘occurrence’ applies only to certain CGL policies that insure a construction professional for liability arising from construction-related work.” Ultimately, Harleysville claims there is no rational basis to warrant this differential treatment.

With respect to the prohibition against special legislation, the South Carolina constitution provides, “The General Assembly of this State shall not enact local or special laws . . . where a general law can be made applicable.”  Similarly, the Equal Protection Clauses of our federal and state constitutions declare that no person shall be denied the equal protection of the laws.

Under the rational basis test, the requirements of equal protection are satisfied when: (1) the classification bears a reasonable relation to the legislative purpose sought to be affected; (2) the members of the class are treated alike under similar circumstances and conditions; and, (3) the classification rests on some reasonable basis. If the legislation does not apply uniformly, the court must next determine the basis for that classification. It is well-settled in South Carolina that the mere fact a statute creates a classification does not render it unconstitutional special legislation. Rather, it is only arbitrary classifications with no reasonable hypothesis to support them that are prohibited.

It is well-established in South Carolina that the insurance industry is highly regulated by the General Assembly. As evidenced by this Court’s discussion in Crossmann II, insurance coverage for construction liability lacks clarity and has been the subject of significant litigation, particularly with respect to whether construction defects constitute “occurrences” under CGL insurance policies. The South Carolina Supreme Court, by ratifying Act No. 26, the General Assembly properly exercised its authority in an attempt to definitively resolve or at least minimize this frequently-litigated issue and does not constitute special legislation or violate equal protection.

Finally, Harleysville argued that the retroactive application of Act No. 26 is unconstitutional in that such application violates the state and federal Contract Clauses.

South Carolina’s constitution provides:

“No bill of attainder, ex post facto law, law impairing the obligation of contracts, nor law granting any title of nobility or hereditary emolument, shall be passed, and no conviction shall work corruption of blood or forfeiture of estate.” S.C. Const. art. I, § 4.

It is undisputed a contractual relationship existed. The court concluded that Act No. 26 substantially impairs the contractual relationship by mandating that all CGL policies be legislatively amended to include a new statutory definition of occurrence and by applying this mandate retroactively.

As a result of the holding where the court severed the unconstitutional portion from the body of the statute, which remains complete in itself, wholly independent of that which is rejected, and is of such a character that it may fairly be presumed the legislature would have passed it independent of that which conflicts with the constitution.

While the court found that Act No. 26 does not violate the separation of powers doctrine, is not unconstitutional special legislation and does not deprive Petitioner of equal protection, it concluded that the retroactivity provision of Act No. 26 is unconstitutional in violation of the state and federal Contract Clauses.  Therefore, Act No. 26 may only apply prospectively to contracts executed on or after its effective date of May 17, 2011.

ZALMA OPINION

Insurance contracts are agreements between people. In this case the state of South Carolina decided it needed to avoid litigation by changing the meaning of the word “occurrence” in a policy of insurance from that which the parties and its courts had found the language in the policy to mean.

Courts should never rewrite insurance policies. Neither should legislatures change the wording of private contracts. In this case the legislature did just that and the Supreme Court agreed that it could validly do so. By so doing the legislature and the Supreme Court of South Carolina has stepped in between the parties to a contract and changed its meaning. This is, in my opinion, a dangerous precedent.

Insurers doing business in South Carolina should amend their CGL policies issued to contractors to comport with the statute and then charge an additional premium to cover the extra losses it must pay.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

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Equity Protects Mortgagee Not Named In Policy

Equitable Rulings Must Be Fair

Courts of equity are not interested in damages as much as they are interested in making a ruling that is fair. The court of equity is allergic to one party taking advantage of another or profiting from innocent errors. The Marling Family Trust (“the Trust”) asked that equity be done and appealed the trial court’s grant of summary judgment in favor of Allstate Insurance Company. In The Marling Family Trust v. Allstate Insurance Company, No. 49A02-1203-CT-186 (Ind.App. 11/16/2012) and charged the Indiana Court of Appeal with determining whether the trust had an equitable right to the proceeds of the Allstate policy even though it was not named in the policy as an insured or as a mortgagee.

Insurance law only obligates an insurer to pay indemnity to persons with whom it contracted or who it promised to pay in the event of a covered loss. The Trust recognized that it was not a party to the contract and that Allstate never promised to pay it indemnity in the event of a loss. It argued, however, that it would be unfair to allow Allstate to avoid payment and put the expense of a loss on the Trust.

FACTS

In January 2006, as security for a promissory note in favor of the Trust, Pipes granted the Trust a second mortgage on his home (“the property”) on West Henry Street in Indianapolis. The mortgage agreement required Pipes to insure the property against loss or damage from fire, lightning, flood, and other common casualties, for the benefit of the Trust. Pipes obtained a “deluxe homeowners” insurance policy through Allstate. The policy period began May 20, 2007, and ended on May 20, 2008. In the event of a loss, the policy required the policyholder-or mortgagee, if the policyholder did not file a claim-to “promptly give [Allstate] or our agent notice.”  The policy also provided that any suit or action against Allstate must be brought “within one year after the inception of loss or damage.”  Notably, Pipes failed to name the Trust as a mortgagee in the Allstate policy.

When Pipes lost the property in foreclosure, the Trust bought it in a Sheriff’s sale on January 16, 2008. Shortly after the Trust took possession of the property, it discovered significant interior water damage. On February 25, 2008, counsel for the Trust sent Allstate a letter notifying it that the Trust had purchased the property and discovered water damage. The letter also informed Allstate of the following:

the Trust held a second mortgage on the property when the damage occurred, the Allstate policy was in effect when the damage occurred, the first mortgagee on the property, Washington Mutual, was named as an additional insured on the policy, and the Trust had reimbursed Washington Mutual for their interest in the property. As a result, the Trust asserted a claim under Pipes’ policy for payment to cover the loss caused by the water damage. It was subsequently confirmed that the damage had occurred before the Sheriff’s sale and that the Trust had not been aware of the damage when it purchased the property.

Three months later, an Allstate claims adjuster notified the Trust that the claim was being reviewed. The adjuster also noted that Allstate’s policyholder was Pipes, with no additional insured listed on the policy. Allstate ultimately refused to distribute policy proceeds to the Trust.

The Trust brought suit against Allstate and eventually Allstate moved for summary judgment, contending, in relevant part, that the Trust had not acquired an equitable lien on the policy proceeds as it claimed. After taking the matter under advisement, the trial court granted Allstate’s summary-judgment motion without issuing findings of fact or conclusions of law.

ANALYSIS

On appeal, the Trust contends that the trial court erred in granting summary judgment in favor of Allstate. The Trust argued that the court failed to recognize that Pipes’ duty to insure the property for the Trust’s benefit gave rise to an equitable lien in the Trust’s favor, thereby entitling it to insurance proceeds under Pipes’ Allstate policy.

In Indiana, where a positive duty is imposed upon the mortgagor to insure for the benefit of the mortgagee, the mere existence of the duty is sufficient to impress upon the proceeds of any policy taken out by the mortgagor an equitable lien in favor of the mortgagee. Once the insurer has notice of the mortgagee’s rights it is considered to have a duty to treat the proceeds of the policy as though the provision that the proceeds should be payable to the mortgagee were written into the policy. The principle is that equity will treat as done that which should have been done. The Trust’s mortgage agreement with Pipes required Pipes to insure the property for the benefit of the Trust as mortgagee. The Trust acquired an equitable lien on the policy proceeds.

Allstate argued that at the time it received notice of the Trust’s mortgagee status and the loss, the property had been foreclosed upon and the Trust had purchased it; thus, the Trust was no longer mortgagee and cannot invoke the equitable-lien theory. The Indiana appellate court noted that it is well established in Indiana that the rights of the mortgagee to the insurance proceeds are determined as of the time of the loss. Therefore, a foreclosure action brought after the loss will not necessarily affect the insurer’s liability to the mortgagee.

The Trust was required to give notice of its interest to Allstate before Allstate distributed the policy proceeds. This requirement of earlier precedent is necessary to protect insurers from the possibility of double payments-one payment to an improper party and another to a previously unknown mortgagee. There is no danger that Allstate will have to dig into its pocket twice for the same claim. In February 2008, the Trust gave Allstate notice of its interest before Allstate distributed any policy proceeds; indeed Allstate has never paid anyone any amount on this claim.

The appellate court concluded, therefore, that the trial court erred in granting summary judgment in favor of Allstate. The Trust’s mortgage agreement with Pipes required Pipes to insure the property for the benefit of the Trust as mortgagee. This is sufficient to give rise to an equitable lien in the Trust’s favor.  The Trust protected its equitable interest in the policy proceeds by informing Allstate of its mortgagee status before any policy proceeds were distributed. Thus, to the extent that the loss is otherwise covered under the terms of Pipes’ insurance policy, the Trust may recover policy proceeds.

ZALMA OPINION

The only reason a mortgagee has a right to proceeds under a first party property policy is to protect its interest as a mortgagee. The opinion here states that the Trust purchased the property at the foreclosure sale, made good the first mortgage, but does not state what it paid for the property.

If the Trust made a full credit bid (that is it paid the full amount of its debt) when it acquired the property at the Sheriff’s sale, the effect of a full credit bid is to satisfy the debt, any lien on the insurance proceeds is extinguished. (4 Miller & Starr, Cal. Real Estate (3d ed. 2000) § 10:61, p. 189; see also Countrywide Home Loans, Inc. v. Tutungi, 66 Cal. App. 4th 727, 731 (1998) [‘lender is not entitled to the proceeds of insurance for damage to the property, because the lender’s only erstwhile interest in the insurance was as security for the debt, now discharged’]; Altus Bank v. State Farm Fire and Cas. Co., 758 F. Supp. 567, 571 (C.D. Cal. 1991): “A mortgagee’s insurable interest under an insurance policy is limited to the amount of the debt paid. Once the debt has been fully extinguished by the full credit bid, so has the insurable interest.”

Since the claim in this case happened before the claim the right to the proceeds belonged to the named insured and the first mortgagee. Both gave up their rights so equity required Allstate to pay the trust. If, however, the Trust, purchased the property with a full credit bid it would have had its insurable interest fully satisfied by the sale and would have no right to the proceeds.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

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Go Directly to Jail

Arson For Profit Proved

Arson for profit is the most dangerous form of insurance fraud because firefighters, neighbors, and innocent bystanders can be injured or killed as a result of an arson fire. In South Dakota, Dawn Hannemann was convicted of arson in connection with a fire in her apartment. She appealed arguing that the circuit court abused its discretion:

  1. in denying her motions for judgment of acquittal and new trial based on a claim of ineffective assistance of trial counsel; and
  2. by excluding an out-of-court statement made by her estranged sister.

In State of South Dakota v. Dawn Hannemann, 2012 S.D. 79 (S.D. 11/20/2012) the Supreme Court decided that the conviction was appropriate and her attempt to place the blame on her sister through hearsay statements were unconvincing.

Facts

On the night of October 31, 2010, Hannemann was alone in her Watertown apartment that she shared with her teenage son. She had taken her son to visit her daughter in Fargo, North Dakota. In the early morning hours of November 1, 2010, a fire started on the first floor of the apartment. Hannemann testified that she attempted to exit through the front door on the first floor. But because of heavy smoke, she opened a second-story-bedroom window, screamed for help, and jumped, injuring herself. Emergency responders arrived, Hannemann was transported to a hospital, and firefighters extinguished the fire.

The Watertown Fire Department, Allstate Insurance Company (Hannemann’s insurer), and Midwest Family Mutual Insurance Company (the apartment owner’s insurer) conducted simultaneous investigations. The Allstate and Midwest investigators believed that the fire had been intentionally set. One Allstate investigator collected carpet samples and sent them to a chemist to be tested for ignitable liquid residue. Another Allstate investigator sent Hannemann’s computer to an electrical engineer to determine whether it played a role in the fire. The Midwest investigator sent the smoke alarms and an electrical outlet from the apartment to a second electrical engineer for analysis.

Hannemann’s court-appointed attorney requested a court-appointed computer expert and made a lengthy discovery motion. Counsel did not request a court-appointed fire investigator, electrical engineer, or chemist. Additionally, counsel did not obtain independent testing of the carpet samples or electrical devices, and counsel did not make a Daubert motion to challenge the reliability of the State’s experts’ opinions.

During the course of a three-day jury trial, the three fire investigators employed by Allstate and Midwest testified that the fire had been intentionally set. The two electrical engineers testified that the electrical devices in the apartment had not caused the fire. The chemist testified that the carpet sample from the fire’s place of origin contained residue from an ignitable accelerant, while samples from other places in the room did not.

Additional evidence also suggested arson. The smoke detectors in the apartment were hard-wired to a circuit breaker with back-up battery power in case of electrical failure. Analysis of these systems revealed that the electrical circuit for the smoke detectors had been turned off and the back-up batteries for three of the four smoke alarms had been removed. Fire investigators also noted that a substantial amount of Hannemann’s clothing, shoes, and decorative wall hangings had been removed prior to the fire.

After the fire, Hannemann filed a $53,000 insurance claim for damage caused by the fire.

Shortly after the fire, Hannemann told law enforcement that she had not touched the smoke detectors in the apartment. At trial, however, Hannemann admitted that she may have removed a battery. Hannemann also admitted that she had browsed the Internet on the night of the fire. Evidence from Hannemann’s computer revealed Internet searches on smoke alarms, renter’s insurance, house fires, and Allstate’s insurance coverage in South Dakota.

The jury found Hannemann guilty of arson by starting a fire with intent to destroy or damage property in order to collect insurance. After trial, Hannemann obtained a new court-appointed attorney who moved for a judgment of acquittal and new trial, claiming ineffective assistance of trial counsel.

Decision

To prevail on a claim of ineffective assistance of counsel, a defendant must show that his counsel provided ineffective assistance and that he was prejudiced as a result. Ultimately, the question is whether there is a reasonable probability that, absent the errors, the factfinder would have had a reasonable doubt respecting guilt.

Hannemann argued that trial counsel was sufficiently deficient on a number of matters to permit review on direct appeal. Hannemann first contends that counsel was deficient in failing to secure an arson expert. Hannemann argues that without an arson expert, trial counsel was unable to properly challenge the admissibility of the State’s scientific evidence through pre-trial motions and cross- examination.

Conflicting evidence presented the appellate court with the following factual disputes:

  1. whether the scene was properly preserved;
  2. what inferences should have been drawn from the presence or absence of accelerant containers;
  3. whether there was adequate testing of the identified accelerant; and
  4. whether appropriate fire investigation protocols were followed. Further, Hannemann testified that she believed the perpetrator was her estranged sister, Ashley Tofteland.

Accordingly, trial strategy may have been the motivation for trial counsel’s failure to utilize an arson expert witness to challenge the State’s scientific evidence indicating that the fire was intentionally set. Hannemann also contends that trial counsel was ineffective in failing to properly subpoena Briggs, her mother. Hannemann and her mother, in support of a new trial motion, testified to the strained relationship with Tofteland. Therefore, even if trial counsel’s failure to properly serve Briggs was ineffective assistance under prevailing norms, the direct appeal record does not demonstrate prejudice; i.e. that Briggs’s testimony would have changed the result of the trial.

Hannemann further contends that trial counsel was ineffective in failing to demonstrate a potential bias of the fire investigators hired by the insurance companies. Hannemann contends that the investigators employed by the insurers had a financial interest in finding that the fire was intentionally set. Although trial counsel did not cross-examine those experts regarding the entities that employed them, the fire investigators disclosed that information in their direct examination. Therefore, Hannemann has not demonstrated that failing to ask about the same information on cross-examination was ineffective assistance or that it was prejudicial.

In Hannemann’s case, there existed inculpatory evidence not involving alleged trial errors. Further, most of trial counsel’s decisions could have involved trial strategy. Finally, as previously noted, Hannemann’s post-trial evidence raises disputes of fact relating to the ineffective assistance and prejudice claims that can only be resolved through a habeas hearing.

ZALMA OPINION

Hindsight over trial strategy does not constitute inadequate counsel. In this case counsel tried to do what the client, Hannemann, wanted: to defend her case by blaming her sister. The attempt failed but it was a strategic decision. Further, the evidence of Hannemann’s guilt was overwhelming and none of the evidence, with hindsight, Hannemann claimed her lawyer should have presented, would not have changed the decision of the trier of fact.

Arson is a stupid way to commit insurance fraud since there is always evidence left like the disabled smoke detectors in this case. Hannemann almost killed herself in this fire, could have killed or injured other residents of her apartment building and the firefighters. Her conviction was affirmed and I can only hope she received a serious sentence.

© 2012 – Barry Zalma

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally, for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes.

He founded Zalma Insurance Consultants in 2001 and serves as its only consultant.

Mr. Zalma recently published the e-books, “Zalma on California Claims Regulations – 2013″; “Rescission of Insurance in California – 2013;” “Random Thoughts on Insurance” a collection of posts on this blog; “Zalma on Insurance Fraud – 2012″; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,”  “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

Mr. Zalma can also be seen on World Risk and Insurance News’ web based television program “Who Got Caught” with copies available at his website at http://www.zalma.

 

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Insured Must Establish a Covered Loss Occurred

Don’t Sue an Insurer Without Evidence

The person insured by a first party property policy has a simple duty to fulfill as a condition precedent to recovery of indemnity under the policy. The duty requires that the insured show that the property, the risk of loss of which was insured, suffered damage from an insured against peril. In Ruth McGhan v. Farmers Insurance Exchange, No. NUMBER 13-11-00433-CV (Tex.App. Dist.13 11/21/2012) the Texas Court of Appeal was asked to reverse a summary judgment obtained by Farmers because there was no evidence of a covered cause of loss.

McGhan claimed to the Texas Court of Appeal that the trial court erred in granting summary judgment because Farmers failed to conduct a reasonable investigation of her claim because no representative from Farmers inspected the damage to McGhan’s 3,500 square foot roof.

BACKGROUND

Farmers was first named as a defendant by McGhan’s third amended petition in which she asserted that Farmers denied her claims in July and September of 2007 because the claims were not covered losses. This petition asserted claims of breach of contract, bad faith, deceptive trade practices, and negligence. In McGhan’s fourth amended petition, filed after the summary judgment was heard, McGhan alleged for the first time that no representative of Farmers adequately inspected the roof when she made her claims in 2007. Her causes of action against Farmers remained the same as alleged in the third amended petition.

Farmers moved for summary judgment. As summary judgment evidence, Farmers attached the policy of insurance, the oral deposition of McGhan, denial letters issued by Farmers, a letter issuing payment to McGhan for roof damage in 2008, post-Hurricane Ike, the affidavit of Carlos Rodriguez of CHR Roofing, and a property inspection report prepared by Jerald Brown.

Farmers asserted that there was no evidence that Farmers breached its contract with McGhan or acted in bad faith or violated any of the provisions of Texas’ deceptive trade practices act.

The facts are that Farmers denied claims of damage based on claims made in July and August of 2007. The July 9, 2007 denial letter said that their investigation revealed that the roof showed signs of wear and tear in the form of flashing failure and the water damage was a result of a slow intermittent leak, but no storm damage was found. The policy provided that loss covered by rain, whether or not driven by wind was excluded from coverage unless the direct force of wind or hail made an opening in the roof or wall and water entered through the opening causing damage.

The denial letter based upon the August claim stated that the investigation showed signs of wear and tear in the form of flashing failures, but no storm damage was found. The letter noted that flashing failures were specifically excluded under the policy. The letter also noted that there were no storm related openings found in the roof or the walls.

ANALYSIS

McGhan’s sole complaint on appeal regarding her July and August 2007 claims is that a Farmers’ representative denied her claim without actually getting on her roof ignoring the fact that representatives of Farmers did get on the roof.

She based her allegations of wrongdoing by Farmers by her own testimony that she did not know if there was storm related damage to the roof because she did not get on the roof. She said that someone named Jason Anderson, a metal roof expert, told her that there was storm related damage. Anderson told her that there was significant damage to the roof in various places and “that it could definitely be responsible for the-leaks we were finding.”

She further testified that someone named Patrick from Farmers came out to her home, looked at the roof and told her that he did not find any storm created damage that was causing the leak. She said that he did not get on the roof during his inspection. She was not sure why Jason Anderson thought there might be coverage.

Farmers properly objected to McGhan’s summary judgment evidence, stating that Jason Anderson had not been properly or timely designated as a witness and any of plaintiff’s statements with respect to what he said would also be hearsay. McGhan’s testimony, with respect to what Anderson might have said is not only hearsay it is without probative force because there is no indication that he was actually an expert or that any testimony he would have given would have been reliable.

The Court of Appeal agreed with the trial court and affirmed the summary judgment in favor of Farmers.

ZALMA OPINION

This case teaches clearly two important requirements an insured must fulfill before being able to collect on a policy of first party property insurance:

FIRST: The insured must prove that there is a loss caused by an insured against peril since no insurance policy covers every possible damage caused to real or personal property.

SECOND:  The proof must consist of evidence not supposition or hearsay.

McGhan failed to do either.