Proof of Mailing Sufficient to Effect Cancellation

Court Trusts the United States Postal Service

For an insurance contract to exist consideration – premium – must be paid. When an insured fails to pay the premium as required by the policy the insurer had the unquestioned right to cancel the policy it had issued.

State legislatures, like that of the state of New York, attempt to protect people insured from cancellation of insurance policies by insurers for no reason or claims of cancellation only after a loss by requiring a mailing to the insured and proof that the notice of cancellation was mailed to the insured. Invariably, the insured finding he, she or it no longer has insurance, will claim that the notice of cancellation was not received. The burden falls on the insurer to prove it gave proper notice.

In In the Matter of the Claim Of Yerly Osorio v. M & L Express, Inc., and Continental Indemnity Company, c/o Applied Risk Services,  Workers’ Compensation Board, 524441, 2017 NY Slip Op 07667, Appellate Division of the Supreme Court of the State of New York (November 2, 2017) the insured’s policy was cancelled for non payment of premium and the insured claimed it was entitled to coverage because the notice was not received.

The insured was found to have coverage and the insurer and employer appealed from the decision of the Workers’ Compensation Board which ruled that the employer’s workers’ compensation carrier was responsible for claimant’s claim.

FACTS

Claimant Osorio filed a claim for workers’ compensation benefits based on allegations that he injured his head, neck and back in a work accident in July 2014. In its report of the accident, the employer acknowledged that the injuries were work-related. A hearing was held on the issue of whether the employer’s one-time workers’ compensation carrier had effectively canceled the employer’s policy and complied with the notice requirements of Workers’ Compensation Law. A Workers’ Compensation Law Judge determined that the carrier remained liable for claimant’s claim because it had not properly canceled the employer’s policy. The Workers’ Compensation Board affirmed finding that the carrier had produced insufficient proof to establish a nexus between its cancellation notice and its proof of mailing.

ANALYSIS

The state of New York requires that the statutory elements of cancellation of a workers’ compensation insurance coverage must be strictly observed. Pursuant to Workers’ Compensation Law “[w]hen cancellation is due to non-payment of premiums and assessments, such cancellation shall not be effective until at least [10] days after a notice of cancellation of such contract, on a date specified in such notice, shall be filed in the office of the chair and also served on the employer.”

The statute further provides that “[s]uch notice shall be served on the employer by delivering it to him, her or it or by sending it by mail, by certified or registered letter, return receipt requested, addressed to the employer at his, her or its last known place of business” (Workers’ Compensation Law § 54 [5]). The carrier has the burden of establishing its compliance in regard to notice of cancellation of coverage.

At the hearing, the carrier produced a letter providing notice of cancellation of the policy to the employer. The letter was dated January 15, 2014 and notified the employer that the policy was being canceled, due to the nonpayment of premiums, effective January 31, 2014. The insurer produced a record of a “certified mail . . . receipt” from the United States Postal Service (hereinafter USPS) that specified that an item was sent to the employer, and the same receipt contained the notation “eff. 1/31/14.” A USPS “[p]roduct [t]racking & [r]eporting” record reflects that the mailing with the same tracking number as this receipt was signed for by the owner and president of the employer on January 25, 2014. Considered as a whole, the record contains uncontraverted proof that the mailed item was correctly addressed and sent by certified mail, return receipt requested, to the employer.

Further, the notation on the USPS receipt referencing the same effective cancellation date as set forth in the notice of cancellation establishes that the mailed item was that notice. Accordingly, the Board’s determination that the carrier failed to meet its burden of establishing the nexus between its notice of cancellation and its mailing proof is not supported by substantial evidence.

ZALMA OPINION

The insurer, by using trackable certified mail, return receipt requested, established that the notice required by the statute was mailed and received by the insured. Why the trial court had trouble finding that evidence sufficient is difficult to understand, but the appellate court made the obvious the rule of law.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

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Insurance Policy Exclusion Must Be Enforced

Public Policy Only Applies if it Injuriously Affects a Material and Substantial Part of the Public

Insurance exclusions, and all provisions of an insurance policy, must be enforced as long as they are clear and unambiguous unless the exclusion is in violation of the state’s public policy. Arguing that an exclusion of a policy is against public policy to avoid the effect of a clear and unambiguous exclusion, Danny Reddick v. Chubb National Insurance Co.,  Civil Action No. 5:17-cv-00059, United States District Court Western District Of Kentucky At Paducah, (November 2, 2017) asked the USDC to require an insurer to pay a claim the clear language of a policy provided it did not owe. Because of the problem with collusion a liability policy will invariably exclude coverage for injury to its own insured or members of his family.

BACKGROUND

The case arose out of a boating accident that took place on Lake Barkley in Trigg County, Kentucky on July 26, 2016. Plaintiff was participating in a local fishing competition and utilizing his personal boat. Plaintiff allowed Joe Noel, who was accompanying Plaintiff that day, to operate the boat. Noel allegedly operated the boat at a high right of speed which resulted in a collision with another vessel. As a result of the crash, Plaintiff suffered numerous injuries, including fractured vertebra. Plaintiff has an ongoing lawsuit against Noel in state court, which is being held in abeyance.

The subject of the dispute currently before the Court is the insurance policy which covered Plaintiff’s boat. Specifically, Plaintiff’s Boatsman Policy, purchased from Defendant, provides for “bodily injury liability coverage in the amount of $300,000.00.” However, Plaintiff’s policy also contains a liability exclusion for precisely the type of incident that occurred on Lake Barkley on July 26, 2016. The exclusion at issue provides as follows:

PART B: LIABILITY COVERAGE…EXCLUSIONS: We do not provide coverage under PART B: LIABILITY COVERAGE for: (a) Liability of other Covered Persons to you or any Resident Relative (b) your liability to any Resident Relative; (c) liability assumed by a Covered Person under any contract or agreement; …”

Plaintiff, after accepting the language of the policy and that Noel was an insured, argues that the Boatsman Policy exclusion goes against public policy and is therefore non-enforceable and plaintiff should be able to recover from his own policy as a result of the negligence of he co-insured, Noel, who was operating the boat with his permission.

DISCUSSION

Under Kentucky law, “if a contract, howsoever innocently entered into, has a direct tendency to, and would if upheld and enforced, injuriously affect a material and substantial part of the public, it will be declared to be one against public policy and most generally nonenforceable.” Forbes v. Ashland, 55 S.W.2d 917, 919 (Ky. 1932). Notably though, contracts voluntarily made between competent persons are not to be set aside lightly.

A contract term is unenforceable on public policy grounds only if the policy asserted against it is clearly manifested by legislation or judicial decisions and is sufficiently strong to override the very substantial policies in favor of the freedom to contract and the enforcement of private agreements.

In support of his argument that the insurance policy he has with Defendant is unenforceable on public policy grounds, Plaintiff cites principally to Lewis v. West Am. Ins. Co., 927 S.W.2d 829 (Ky. 1996). In Lewis, the Kentucky Supreme Court held that the so-called “family” or “household” exclusion in an automobile insurance policy was unenforceable as contravening public policy. The family/household exclusion “limit[ed] the insurance coverage available for a person’s injuries solely on the basis of the injured party’s status as a member of the policyholder’s family.” The defendant in Lewis tried to use this policy provision in order to minimize its payment to a nine-year old girl who was seriously injured in a car wreck. Whereas the automobile insurance policy covering the car in which she was riding provided liability coverage in the amount of $100,000 per person and $300,000 per accident, the family/household exclusion provision limited the girl’s recovery to $25,000, the “statutory minimum where the injured person is the named insured or a member of a named insured’s family, regardless of who is driving the automobile.”

The USDC declined to extend the decision in Lewis to boatsman insurance policies, especially in the face of direct language from the Kentucky Supreme Court limiting its holding to automobile policies based upon statutory language that exists for automobiles and because no similar statute exists as to boat insurance.

It is true that the Lewis Court addressed public policy at length, as well as “[t]he need for adaptation in the law [which] was fully recognized by the founders of our Republic.” However, the judicial system’s ability and authority to make changes under the guise of public policy is not absolute. The establishment of public policy is not within the authority of the courts. It is the prerogative of the legislature to declare that acts constitute a violation of public policy.

Plaintiff could not, and did not, point to analogous constitutional provisions, statutes, or decisions of courts of last resort that pertain to boatsman insurance policies. It was from an automobile liability insurance statute that the Kentucky Supreme Court’s decision in Lewis flowed. Because there is no applicable boating laws or court decisions, the USDC declined the plaintiff’s request to entertain the notion of holding boating policies unenforceable.

Plaintiff’s suit was, therefore, dismissed.

ZALMA OPINION

Liability insurance is designed to protect the person insured if he or she causes injury to a third person. By allowing another to operate his boat does not change the risk the insurer agreed to take. Although the plaintiff may have a serious lawsuit against the operator of the boat it does not create coverage that was clearly and unambiguously excluded. The state of Kentucky did not state a public policy to change a provision, only after injury, that the plaintiff wanted the policy he bought changed.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Insurer Not Severed from Indemnity Action Brought Against It and Insurer

No Concern for Insurer Joined in Suit Against Additional Insured

Additional insureds who seek defense from their insurer will often sue seeking declaratory relief but try to keep the case limited to the dispute with the insurer. In what has become a great honor a New York Appellate court resolved an insurance dispute in a truly brief and concise opinion in Isidore Margel Trust Mitzi Zank Trustee, v. Mt. Hawley Insurance Company, 3720 Nostrand Laundromat, LLC, 2017 NY Slip Op 07595, 2017-04090, Supreme Court Of The State Of New York Appellate Division, Second Judicial Department, (November 1, 2017).

The suit sought declaratory relief and common-law and contractual indemnification. The defendant 3720 Nostrand Laundromat, LLC, appealed from an order of the Supreme Court, Queens County (trial judge, E. Hart) which denied its motion to sever the second and third causes of action asserted against it from the first cause of action asserted against the defendant Mt. Hawley Insurance Company.

FACTS

The plaintiff is the owner of real property in Brooklyn (hereinafter the subject premises), which it leased to the defendant 3720 Nostrand Laundromat, LLC (hereinafter the Laundromat). The plaintiff was named as the only defendant in a separate action commenced by Ludmila Burtman to recover damages for personal injuries she allegedly sustained when she tripped on the sidewalk outside the subject premises (hereinafter the Burtman action). The plaintiff tendered its defense in the Burtman action to the defendant Mt. Hawley Insurance Company (hereinafter Mt. Hawley), as an additional insured on a policy of insurance Mt. Hawley issued to the Laundromat. Mt. Hawley denied the plaintiff’s request. The plaintiff thereafter sued Mt. Hawley for a judgment declaring that Mt. Hawley is obligated to defend and indemnify it in the Burtman action, and against the Laundromat, seeking common-law and contractual indemnification or contribution and damages for failure to procure insurance.

The Laundromat moved to sever the causes of action asserted against it from the cause of action asserted against Mt. Hawley. The Supreme Court denied the motion, and the Laundromat appeals.

ANALYSIS

A court may sever claims in furtherance of convenience or to avoid prejudice. The denial of a request for severance is a matter of judicial discretion, which should not be disturbed on appeal absent a showing of prejudice to a substantial right of the party seeking severance.

In arguing that the Supreme Court improvidently exercised its discretion in denying its motion for severance, the Laundromat asserts that it is generally recognized that it is prejudicial to have the issue of insurance coverage tried before the jury that considers the underlying liability claims. However, the courts have recognized such potential for prejudice where the liability claims are asserted against the party whose insurance coverage is also in question.

Those are not the circumstances here. Where the liability issues relate to whether the Laundromat was negligent and the insurance coverage issues relate to whether the plaintiff is covered, separately, as an additional insured. Further, there would be the potential for inconsistent verdicts on the cause of action against Mt. Hawley and the plaintiff’s claim of failure to procure insurance asserted against the Laundromat if the severance motion were granted. Under these circumstances, it cannot be said that the court’s exercise of discretion to deny the motion for severance was improvident.

ZALMA OPINION

Simple, concise conclusion. No reason for the severance since there was no potential for inconsistent verdicts.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Fraud Scheme Fails

Performing Expensive Unnecessary Test for Insured and Not for Uninsured is Fraud

Health insurance fraud is extremely profitable and seldom discovered and prosecuted. When it is successfully prosecuted the defendants, who have made millions by fraud, have sufficient funds to pay lawyers to appeal the conviction. Most attempts to reverse a conviction fail, but they do delay incarceration in the gray bar hotel – federal prison.

In United States of America v. Beth Palin; United States of America v. Joseph D. Webb, United States Court of Appeals, Fourth Circuit, No. 16-4522, No. 16-4540, (October 30, 2017), after a bench trial, the district court found Beth Palin and Joseph Webb (wife and husband) guilty of health care fraud and conspiracy to engage in health care fraud, in violation of 18 U.S.C. §§ 1347 and 1349. They did not accept their conviction and appealed.

FACTS

During a two-week trial, the district court considered numerous documents and the testimony of more than twenty witnesses. The evidence found included: Palin owned Mountain Empire Medical Care (“MEMC”), an addiction medicine clinic, and Bristol Laboratories (“the Lab”), which processed urine drug tests ordered by MEMC doctors, among others. Webb assisted Palin in the operation of both facilities. 

The Lab performed two types of urine tests: the basic, inexpensive “quick-cup” test and a more sophisticated, more expensive “analyzer” test. Although referring doctors ordered their patients to undergo drug tests, the doctors did not specify the type of test. Palin and Webb made that decision, instituting procedures in which insured patients were treated differently than uninsured patients.

In general, uninsured patients paid cash and received one test each week—the “quick-cup” test. Insured patients received both the “quick-cup” and the more expensive “analyzer” test. The Lab billed insurers (which included Medicare and private insurance companies) for the sophisticated test.

In a detailed written opinion, the district court found Palin and Webb “knowingly and willfully executed a scheme to defraud health care benefit programs”. The court found that performing additional, weekly, expensive tests for insured patients that was not medically necessary; that insurers have rules prohibiting providers from submitting claims for unnecessary tests; and that Palin and Webb knew the additional tests were unnecessary but hid that fact when billing the insurers.

Palin and Webb then moved for judgments of acquittal or, in the alternative, for a new trial, relying in part on Universal Health Services, Inc. v. United States ex rel. Escobar, ––– U.S. ––––, 136 S.Ct. 1989, 195 L.Ed.2d 348 (2016), which was issued after the district court had found them guilty. They contended that Universal Health changed the materiality standard applicable to health care fraud and, under the new standard, their asserted misrepresentations were not material.

The district court issued a careful opinion and order denying the motions. In that opinion and order, the court acknowledged that its opinion finding Palin and Webb guilty did not discuss materiality as an element of health care fraud. But, the district court explained that the misrepresentations at issue in this case were material, even assuming the standard outlined in Universal Health applied.

ANALYSIS

On appeal, the Government agrees with the defendants that materiality constitutes an element of health care fraud and conspiracy to commit health care fraud. In Neder v. United States, 527 U.S. 1, 21–25, 119 S.Ct. 1827, 144 L.Ed.2d 35 (1999), the Supreme Court held that the mail, wire, and bank fraud statutes incorporated the common-law definition of “fraud,” which requires “a misrepresentation or concealment of material fact.” Materiality is, therefore, an implicit element of those statutes.

The trial court’s findings suggest that it viewed the misrepresentations at issue — that the sophisticated tests were medically necessary — as material to the decision by insurers to pay for claims submitted by the Lab. For example, the district court found that Palin and Webb performed medically unnecessary tests, hid this fact from insurers, and sought payment for those tests from insurers when applicable rules prohibited the submission of claims for medically unnecessary tests.

Even if the district court failed to consider materiality when finding Palin and Webb guilty, the Fourth Circuit concluded the error was harmless. The record contained no evidence that could rationally lead to a contrary finding with respect to that omitted element. Rather, the record conclusively established that insurers would not have paid for the second, more sophisticated tests had they known those tests were not medically necessary. No rational fact finder could conclude otherwise nor could a fact finder find that the charge to insurers only was material.

According to Palin and Webb, the Court’s discussion of materiality in this specific FCA context applies here and bolsters their claims that any misrepresentations they made were not material. In short, they claimed that because Palin and Webb billed insurers for the second, sophisticated tests, and because the insurers regularly paid those claims despite knowing the type of test (analyzer) and the frequency of testing (weekly), it follows that “no material misrepresentations existed.”  

The Fourth Circuit also concluded that Supreme Court did not intend to broadly “overrule” materiality standards that had previously applied in the context of criminal fraud. As the district court concluded in denying the post-trial motions, Palin and Webb’s misrepresentations were material even under the Universal Health standard. The insurers here did not reimburse claims despite knowing Palin and Webb sought payment for tests that Palin and Webb knew were not medically necessary. No evidence even suggests that medical necessity was anything less than a critical prerequisite to payment.

The indictment challenged by Palin and Webb was valid. It cites the statutes that Palin and Webb were charged with violating and uses the relevant statutory language to describe the charged crimes. The indictment also sets out the facts and circumstances of the alleged offenses in sufficient detail. For instance, it alleges that Palin and Webb—not the referring doctors—decided the type of test that a patient received. It further alleges that Palin and Webb treated patients differently based on insurance status: uninsured patients received only the basic test while insured patients received both that test and a second more sophisticated and expensive test.

Considered in the light most favorable to the Government, the evidence establishes that Palin and Webb originated and executed a corrupt scheme pursuant to which they determined the frequency and type of tests ordered by referring physicians, performed and billed insurers for tests they knew were medically unnecessary, and hid the fact that the tests were unnecessary from insurers so that insurers would not reject their claims. That constitutes a scheme to defraud under federal statutes.

A scheme to defraud may center on acts taken to conceal, create a false impression, mislead, or otherwise deceive in order to prevent the other party from acquiring material information and, as a result the judgment of the district court was affirmed.

ZALMA OPINION

The defendant’s argument that since their fraud succeeded in deceiving the insurers the misrepresentations were not material the Fourth Circuit properly gave short shrift by the court since, if that argument was successful, no fraud perpetrator could ever be convicted. The crime was obvious and the defendants deserve whatever prison sentence the court can impose and must be ordered to make restitution.


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

 

 

 

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A “Wells Notice” is a Claim

Notice of Circumstance is not a Claim

The Securities and Exchange Commission (SEC) has various rights, duties and obligations. It can investigate and it can prosecute after finding sufficient facts to do so. Liability insurance only provides coverage for an insured after a claim is made. Liability insurance does not agree to defend or indemnify an insured if it is being investigated by the SEC or some other agency.

In Musclepharm Corporation v. Liberty Insurance Underwriters, Inc., No. 16-1462, United States Court Of Appeals For The Tenth Circuit, (October 17, 2017) MusclePharm Corporation (“MusclePharm”) appealed the district court’s grant of summary judgment in favor of Liberty Insurance Underwriters, Inc. (“Liberty”).

The lawsuit arose from a United States Securities and Exchange Commission (the “SEC”) investigation of MusclePharm (“the investigation”).

FACTUAL BACKGROUND

The Policy

MusclePharm and Liberty entered into an insurance agreement for the period beginning on January 6, 2013 and ending on January 6, 2014. The agreement, a “claims made policy,” covered “claims first made against” MusclePharm “during the policy . . . or discovery period[s], . . . and reported to” Liberty “as soon as practicable but . . . no . . . later than 60 days after the end of the policy . . . or discovery period[s].” (emphasis omitted).

Insuring Agreement 1.2 generally governed the parties’ relationship. It states:

Insured Organization Reimbursement: The Insurer shall pay on behalf of the Insured Organization all Loss which is permitted or required by law to indemnify the Insured Persons as a result of a Claim first made during the Policy Period or Discovery Period, if applicable, against the Insured Persons for a Wrongful Act which takes place before or during the Policy Period.

The SEC Investigation

On May 16, 2013, the SEC mailed a letter to MusclePharm stating that it was “conducting an inquiry into MusclePharm” and “requesting that MusclePharm voluntarily produce documents” (the “May 16 letter”). The letter noted, “[t]his inquiry is non-public and should not be construed as an indication that the Commission or its staff believes any violation of law has occurred, nor should you consider it an adverse reflection upon any person, entity, or security.” MusclePharm complied.

Later, on July 8, 2013, the SEC issued an “Order Directing Private Investigation and Designating Officers to Take Testimony” (the “July 8 Order”) to MusclePharm. The July 8 Order stated that the SEC “has information that tends to show that from at least January 1, 2011,” MusclePharm “possibl[y]” violated provisions of the Securities Act of 1933 and the Exchange Act of 1934. It ordered “that a private investigation be made to determine whether any persons or entities have engaged in, or are about to engage in, any of the reported acts or practices or any acts or practices of similar purport or object.”

It also noted that specific SEC officers may “administer oaths and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of books, papers, correspondence, memoranda, or other records deemed relevant or material to the inquiry.” The footer of each page of the July 8 Order contained the following disclaimer: “it should be understood that the Commission has not determined whether any of the persons or companies mentioned in the order have committed any of the acts described or have in any way violated the law.”

Thereafter, the SEC issued 21 subpoenas to MusclePharm and to individual officers and directors. The subpoenas instructed MusclePharm to produce documents. The subpoenas also required individuals to produce documents and to appear for testimony. Cover letters accompanied the subpoenas and noted that “[t]he investigation is confidential and nonpublic and should not be construed as an indication by the Commission or its staff that any violation of the law has occurred, or as a reflection upon any person, entity, or security.”

The Coverage Dispute

On June 20, 2013, MusclePharm sought coverage from Liberty under the policy for its expenditures, attaching the SEC’s May 16 letter, and stating that if the SEC’s May 16 letter “d[id] not arise to the level of a claim, then” MusclePharm would like it “considered a notice of circumstance.” On August 21, 2013, MusclePharm forwarded to Liberty the SEC’s July 8 Order. On September 18, 2013, based on the May 16 letter and the July 8 Order, Liberty denied coverage. However, Liberty treated the matter as a notice of circumstance under the policy. Liberty has stated that it intends to cover post-Wells notice costs “incurred in connection with a covered claim against Insured Persons,” but it insists that MusclePharm has not yet explained how it calculated its costs.

ANALYSIS

 The Policy Definition of “Claim

MusclePharm first argues that the district court misconstrued the policy’s definition of the term “claim.”

For coverage under the policy, the following elements must be present: (i) there must be a claim; (ii) the claim must be made during the policy period; (iii) the claim must be lodged against an insured person or an insured organization; and (iv) the claim must be for a wrongful act. These four requirements for coverage were not met until the SEC issued Wells Notices on February 13, 2015.

A “Wells Notice” is an alert that the SEC’s Enforcement Division is close to recommending to the full Commission an action against the recipient and provides the recipient the opportunity to set forth his version of the law or facts. The SEC’s issuance of Wells Notices triggered part (d) of the policy’s “claim” definition, as the district court held and the parties do not dispute. Therefore, the issue presented is narrowed to whether the July 8 Order and the related subpoenas fall within parts (a) or (c).

The policy at issue here does not define “relief,” so the court was compelled to turn to dictionary definitions to establish its plain and ordinary meaning. The July 8 Order states that the investigation is “be[ing] made to determine whether any persons or entities have engaged in, or are about to engage in, any of the reported acts or practices or any acts or practices of similar purport or object.” Thus, the SEC sought to determine, through documents and testimony, whether there would ultimately be any basis for seeking monetary and/or non-monetary relief from MusclePharm. By this action, the SEC was not seeking relief, but was only gathering information.

Under the policy, the insured does not have a covered “claim” without an allegation of wrongdoing against an insured person, and the SEC stated in both the July 8 Order and the related subpoenas that these documents were not alleging wrongdoing. Therefore, the July 8 Order and the related subpoenas are not covered under the policy.

The determinative fact is that the policy explicitly states Wells Notices are covered, whereas costs for the July 8 Order which do not “allege” a “wrongful act” are not.

ZALMA OPINION

A claim requires a demand for “relief” – that is, money or actions, needed to cure a problem. The Wells Notice was a claim for relief and there was coverage for defense. Everything the SEC did before issuing a Wells Notice, was not a claim and not covered. Best to avoid trouble with the SEC rather than try to effect coverage by suing the insurer.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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Zalma’s Insurance Fraud Letter – September 1, 2017

The Essential Resource For The Insurance Fraud Professional

What is Insurance Fraud?

An intentional perversion of the truth for the purpose of inducing another in reliance upon it to part with some valuable thing belonging to him or to surrender a legal right; a false representation of a matter of fact, whether by words or by conduct, by false or misleading allegations or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.
Barry Zalma, Inc. is available to provide expert advice to individuals and their counsel. Advice from Barry Zalma, Inc. is indispensable to the resolution of insurance disputes. Consultation from Mr. Zalma  can save you, your counsel or client hundreds of hours of investigative and legal work.

Zalma’s Insurance Fraud Letter, Volume 21, No. 21


 The Current Issue Contains the Following 

  • What is Insurance Fraud?
  • Become a Certified Expert in Corporate Property Insurance and a Certified Expert in Corporate Liability Insurance
  • California Acts to Protect Consumers from Fraud
  • California Suspends 3 More Medical Providers for Fraud
  • Books from Barry Zalma
  • Federal Investigation Into Public Employee Prescription Fraud
  • Barry Zalma Speaks at Your Request
  • Mishandling Insurance Claim Causes Lawyer to Be Suspended
  • Intentional Manslaughter Not Fortuitous
  • Wisdom
  • Barry Zalma
  • $9.1 Million Sanction For Frivolous Suits
  • Good News From the Coalition Against Insurance Fraud
  • Don’t Plead Guilty If You Don’t Mean It
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Zalma’s Flat Rate Opinions
  • Books from the American Bar Association

Zalma on Insurance – A Blog

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

Check in every day for a case summary at http://zalma.com/blog:

Zalma’s Insurance 101

I have completed a video blog called that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.
Some of the 1,022 videos follow: If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.
Barry Zalma, Inc.
4441 Sepulveda Boulevard
CULVER CITY CA 90230-4847
310-390-4455
Fax: 310-391-5614
zalma@zalma.com
http://www.zalma.com 
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Do the Crime – Do the Time – And Pay Restitution

Insurance Available to Victim of Crime Should Not Be Used to Avoid Restitution

When a crime victim suffers bodily injury or property damage it the duty of the trial court to order restitution be paid by the convicted criminals to his victims. They often argue that the victim has insurance or is eligible for Medicare or Medicaid so they do not need restitution.

Every insurer, as the second victim of the crime, should demand restitution be paid to them. If not, they face the possibility that the court will allow the insurer or government agency to pay the entire damages caused by the criminal. For that reason I always recommend that clients who are victims of a crime demand that they be included in the orders of restitution. When they do not they allow the criminals to profit from their crime.

In State Of Delaware v. Jorge Reza-Ayala, Joshua Scruggs, Kaleef Smyre, Brandon Kasinath, Carlos Hernandez, Jorge Hernandez, Criminal ID No. 1503016342, Criminal ID No. 1503016361, Criminal ID No. 1503016366A, Criminal ID No. 1503016366B, Criminal ID No. 1503014277, Criminal ID No. 1503014824, Criminal ID No. 1602001201, Superior Court of The State of Delaware (October 19, 2017) a shooting of a vehicle and its occupants occurred at Rogers Manor Park in the Rogers Manor Neighborhood in New Castle County, Delaware. The above referenced six defendants conspired to rob the occupants of the vehicle. In carrying out their conspiracy, two occupants of the vehicle, and the vehicle itself, were shot.

Jose Louis Padilla-Gonzales, the driver of the vehicle, suffered gunshot wounds to his left shoulder and arm. He had an open wound that was about the size of a baseball. Miguel Escober, the front seat passenger, was shot in the face and sustained massive injuries to the entire right side of his face and head. Both of the victims were transported to Christiana Hospital Emergency Room for medical care.

All of the Defendants were charged with attempted murder (the shooting of Miguel Escobar), assault first degree (the shooting of Jose Padilla-Gonzalez), robbery, conspiracy and a number of related crimes arising out of the incident.

All of the Defendants were convicted of conspiracy. Five of the six defendants also pled guilty to robbery. The sixth defendant, Kaleef Smyre, whose charges were bifurcated for trial, was convicted at trial for conspiracy and criminal mischief and pled guilty to possession of a firearm by a person prohibited.

At sentencing, each of the Defendants was ordered to pay restitution. The restitution award was ordered to be joint and several as to each of the Defendants.

RESTITUTION PROCEEDINGS

The State submitted a restitution report, with supporting documentation, initially seeking a restitution award in the total amount of $170,988.05, which was subsequently supplemented to reflect continuing expenses incurred by the victims or on their behalf.

 

A restitution hearing was held to address the opposed requests for restitution.

RESTITUTION

As a preliminary matter, at a restitution hearing, it is the State’s burden to prove by a preponderance of the evidence what amounts are owed to the victim. The Court has broad authority to order the Defendants to pay restitution for the victim’s medical expenses.

Where the amount of restitution is geared directly to the amount of the victim’s loss caused by the Defendants’ criminal activity, proportionality is already built into the order. The Defendants are responsible for the medical expenses incurred by their victims as a result of the shooting.

Defendant Scruggs also opposed this restitution request because Mr. Escobar qualified for Medicaid for most of his medical expenses. Defendant Scruggs contends that if Christiana Care cannot seek the outstanding medical expenses from Mr. Escobar, himself, then it cannot seek a restitution award from the Defendants for those outstanding medical expenses. Defendant Scruggs is correct in this regard. If Christiana Care is not permitted to seek the outstanding medical expenses from Mr. Escobar then the Defendants are likewise not responsible for paying those medical expenses.

Mr. Padilla-Gonzalez was shot in the left shoulder and arm. He had an open wound that was about the size of a baseball. Mr. Padilla-Gonzalez did not qualify for Medicaid coverage and had no other health insurance.

 

Although the retail rates charged by Christiana Care to uninsured patients are greater than the reimbursement rates Christiana Care receives from patients covered by government (Medicaid and Medicare) and private insurance, this two-tiered structure reflects the corresponding risks of medical care providers when treating insured versus uninsured patients. The “retail rates” charged to uninsured patients are frequently uncollected while insured patients are billed at reduced contract rates but the insurance providers pay these reduced rates in full. With contract rates there are reduced payments but it is not accompanied by the uncertainty and delay that accompanies the retail rates.

A Court cannot force Christiana Care, a nonparty to this action, to accept some lesser amount for medical services rendered. If the obligation to pay the medical expenses is arbitrarily reduced for the Defendants, then the victim is left holding the bag, and remains solely liable to Christiana Care for the remaining portion of the medical expenses outstanding.

The law should favor the victim of the wrong over that of the wrongdoer. As between the victim and the assailant, the assailant should be responsible for the victim’s medical expenses to the same extent that the victim is liable to the third-party health care provider.

Unlike the tort context, in this criminal matter, any and all credits or reductions made to reduce the victims’ outstanding obligation to Christiana Care are to be fully credited to the Defendants. However, the Defendants must take their victims as they find them. Mr. Escobar qualified for Medicaid coverage for most of his medical expenses, and the Defendants received the benefit of that governmental insurance to the full extent that Mr. Escobar received the benefit. Therefore, Defendants are liable for Mr. Escobar’s medical expenses that were not covered by Medicaid and for which he continues to remain liable to Christiana Care.

The Defendants are responsible to their victims for their medical expenses to the extent that the victims remain liable to Christiana Care for their medical expenses. Once the victim no longer owes a debt to the hospital for its services, nothing more is owed to the victim.

The State has established by the preponderance of the evidence that the medical expenses charged by Christiana Care are the usual and customary retail rates charged to all its patients. The State has also established by the preponderance of the evidence that the medical expenses charged by Christiana Care were for hospital, ancillary health and physician services related to the resulting injuries to Mr. Padilla-Gonzalez as a result of being shot on March 22, 2015.

Although these charges are higher than those with insurance coverage would be required to pay, there is no evidence to demonstrate that these charges are significantly higher than what the victim would have been charged at another hospital in the region, or that the victim would have been charged a significantly reduced rate at another hospital within the region.

Defendants’ liability for the victims’ medical expenses owed to Christiana Care is in lock-step with the victims’ liability to Christiana Care.

Restitution Payments

The Delaware Supreme Court instructed that restitution should cover the victim’s own out-of-pocket expenses and losses as a first priority. The Court has broad discretion to craft an award tailored to the circumstances of each individual case. Under the facts and circumstances of this case, this overarching priority would not be met if payments were first applied to the VCAP. Therefore, payments in this matter should first be applied to Mr. Padilla-Gonzalez’s direct out of pocket losses and then to the VCAP, followed by the other payments as ordered herein.

ZALMA OPINION

Insurance companies, like Medicaid in this case, are their own worst enemy by failing to appear to make a claim for their losses. The court allowed the restitution order to be limited to the victim rather than the entity that paid the victim’s expenses, Medicaid. Had Medicaid appeared at the restitution hearing and demanded its rightful restitution it would have been ordered. The uninsured victim received full restitution and Medicaid, the true monetary victim who paid for another victim’s injury, received nothing.


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Are Insureds More Equal Than Insurers?

Montana’s Insurance Exception to the American Rule Re Attorneys’ Fees

The “American Rule” requires both parties to a tort action to pay their own attorneys. There is no right for a litigant to collect attorneys fees from the defendant. However, proving George Orwell’s comment in Animal Farm that, although all litigants are equal in the United States, some are more equal than others.

In Tanya L. Mlekush v. Farmers Insurance Exchange, 2017 MT 256, DA 16-0670, Supreme Court Of The State Of Montana (October 24, 2017) the Supreme Court concluded that it was necessary to enforce an insurance exception to the American Rule so that an insured who successfully sues an insurer for more than the insurer’s last offer is entitled to recover attorneys fees.

FACTUAL BACKGROUND

On January 15, 2011, Tanya L. Mlekush (Mlekush) was injured in a two-vehicle collision. At the time, Farmers Insurance Exchange (Farmers) insured Mlekush under a policy that provided underinsured motorist (UIM) coverage. After the accident, Mlekush retained counsel.

In August 2012, the other driver admitted liability and tendered the liability insurance policy limits of $50,000. On October 2, 2012, Mlekush’s counsel sent Farmers a letter requesting a UIM claim be opened and to have the assigned adjuster contact counsel. Farmers and Mlekush exchanged information regarding Mlekush’s claim and medical expenses over the next few months.

Unable to reach a settlement with Farmers  Mlekush filed a complaint in District Court for “all sums due and owing” from Farmers. Mlekush stated her reason for initiating litigation at this point was that Farmers questioned causation on a clear medical record and denied advance payment of surgical costs. For the next seventeen months, the parties exchanged settlement offers, requests for advanced payment for medical procedures, and additional medical information.

Farmers made, over time multiple offers of settlement from $18,831.25, $60,000, $75,000, and finally to $77,500 to settle the claim.

Never reaching an agreement a jury trial took place and the jury returned a verdict of $450,000 in favor of Mlekush. Judgement was entered for the policy limit amount of $200,000.

Mlekush then filed a memorandum of costs and a motion for attorney fees and nontaxable costs under the insurance exception to the American Rule. On January 12, 2015, the District Court denied Mlekush’s motion for attorney fees, finding the insurance exception did not apply to Mlekush’s claim because Mlekush initiated the action prematurely; she was therefore not “forced to assume the burden of legal action.” Mlekush appealed.

PRIOR RULING

The Supreme Court in Mlekush v. Farmers Ins. Exch., 2015 MT 302, 381 Mont. 292, 358 P.3d 913, concluded that the District Court’s exclusive reliance on when Mlekush initiated her action was error; “the determination of whether an insured is entitled to attorney fees under the insurance exception, though a matter of law, necessitates factual findings that take into consideration both parties’ actions during the entire process leading up to the ultimate resolution of the claim.” The Court remanded the issue to the District Court for development of the factual record to determine if Mlekush was entitled to attorney fees because Farmers forced her to assume the burden of legal action to obtain the full benefit of her UIM policy.

On November 3, 2016, the District Court denied Mlekush’s motion for attorney fees. The District Court found that an exception to the American Rule does not apply to disputes over the value of an insurance claim, that Farmers did not deny her claim, and that Farmers’ conduct during the claim investigation and in negotiations was in good faith and reasonable. Mlekush appealed.

DISCUSSION

Montana follows the American Rule regarding attorney fees: each party is ordinarily required to bear his or her own expenses absent a contractual or statutory provision to the contrary. However, the Supreme Court recognizes several equitable exceptions to this rule, including in the area of insurance.

The Montana Supreme Court has determined that an exception exists where a first-party insured has incurred attorney fees based on an insurer’s breach of the duty to defend.

An insured is entitled to recover attorney fees, pursuant to the insurance exception to the American Rule, when the insurer forces a Montana insured to assume the burden of legal action to obtain the full benefit of the insurance contract.

Recognizing that a contract of insurance is one of adhesion, created by the insurance company and offered to the consumer on a “take it or leave it” basis. The insurance company has all the bargaining power and the consumer has no ability to bargain for better rates or coverage.

Insurance contracts are a necessary commodity for consumers seeking personal liability and injury protection. Thus, when a first-party insured buys insurance, like UIM protective coverage in this case, he or she does so with the reasonable expectation that they will be treated fairly and will not have to resort to expensive, time-consuming litigation in order to recover what they are rightfully entitled to under the terms of their insurance policy. When they are compelled to sue for their benefits and they recover more at trial than was offered by the insurance company, they are entitled to recover their attorney fees.

The Insurance exception is not a bad faith concept; it simply recognizes that the insured should not bear the expense when she has to resort to litigation in order to recover the benefits for which the insured has contracted and paid premiums. Forcing a first-party insured to bear the burden of attorney fees, when the insured seeks only the full benefit of her insurance claim, defeats the purpose of having an insurance exception.

This case establishes that in Montana, when a first-party insured is compelled to pursue litigation and a jury returns a verdict in excess of the insurer’s last offer to settle an underinsured motorist claim, the insurer must pay the first-party insured’s attorney fees in an amount subsequently determined by the district court to be reasonable. If a first-party insured goes to trial and obtains a verdict in excess of the insurer’s last offer, this constitutes prima facie proof that the insured was forced to assume the burden of legal action to obtain the full benefit of the policy, thus obviating the need for an inquiry as to whether or not the insurance exception applies.

However, in cases in which the policy limits are tendered prior to a verdict being returned, the district court may consider the entirety of the litigation to determine “whether, and to what extent, [the] insured was forced to assume the burden of legal action in order to recover the full benefits of the insurance contract.

In the case at hand, Mlekush was compelled to sue and the jury returned a verdict higher than the amount of the last offer made by Farmers to settle her underinsured motorist claim. Farmers is required to pay Mlekush’s attorney fees.

ZALMA OPINION

Montana has created an exception to the American Rule in favor of insureds and against insurers. Hopefully, if an insurer offers more than a jury eventually awards it can be treated equally and be awarded attorneys’ fees from the insured, because the insured forced it into unnecessary litigation. If, for example, the jury only awarded Mlekush $45,000 then Farmers should have been entitled to the fees the insured compelled them to litigate. All litigants should be treated equally and the insurance exception should apply in both directions. I’m not sure, and the opinion doesn’t say, it will be applied in both directions.


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Punitive Damages and Taxes

The IRS Takes the Joy Out of a Punitive Damages Award

 

The stated purpose of punitive damages is to punish a wrongdoer civilly to deter the wrongdoer and others from acting wrongfully. Insurance Bad Faith litigants dream of large punitive damage awards as a bonus and revenge upon the insurer that did not treat them fairly.

Plaintiffs’ lawyers who obtain large punitive damage awards use them to brag about their ability as tort lawyers. The insurance bad faith plaintiffs’ lawyers trot out a punitive damage award to other defendants they have sued to bludgeon them to put up multiple millions to settle for more than they owe.

What the litigants and litigators seldom consider carefully is the tax consequences of a large punitive damage award. Failure by a plaintiffs’ lawyer to properly advise a plaintiff seeking punitive damages about the tax consequences of success should, and probably will, result in claims of legal malpractice.

How Does the IRS Deal With Punitive Damages?

Tort damages are designed to put the defendant back in the situation he was in before the tort. When the damages are paid the plaintiff gains nothing. Rather, he is made whole.

Punitive damages, on the other hand, do not compensate the plaintiff for lost wages, pain, suffering, property damage or any other damages designed to place the plaintiff back the way he was before the tort occurred. Punitive damages are considered by the government, therefore, to be a windfall to the taxpayer and are considered income. The Internal Revenue Service requires the plaintiff who receives a punitive damages award to include the amount of punitive damages awarded as income when the plaintiff files his tax return.

The Internal Revenue Code is clear on the subject because § 104 provides, in relevant part.

Compensation for injuries or sickness

(a) In general

Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include—

(1) amounts received under workmen’s compensation acts as compensation for personal injuries or sickness;

(2) the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness; …

What Happens When the Recipient of Punitive Damages Fails to Pay Income Tax on the Recovery?

After a tort trial when damages are awarded and the judgment becomes final the defendant pays the plaintiff through his or her counsel. Counsel takes out of the final payment – when a contingency fee agreement exists – his fees and costs and delivers the remainder to the plaintiff. When a judgment includes damages for bodily injury or property damage the funds received are not considered income because they merely return the plaintiff to the position he or she was in before the tort. However, the government is quite strict when damages include money that had nothing to do with putting the plaintiff back in the condition he or she was in before the tort.

In Jack R. Hawkins, Cynthia J. Hawkins, husband & wife, v. United States of America, 30 F.3d 1077, 74 A.F.T.R.2d 94-5363, 63 USLW 2076, 94-2 USTC P 50, 386 (1994) he facts are undisputed. In 1979, Cynthia Hawkins crashed the taxpayers’ $8,000 car, totaling it. Ms. Hawkins and her husband sued their insurer, Allstate and ultimately recovered $15,000 in compensatory damages and $3.5 million in punitive damages.

For taxation purposes, gross income includes all income from whatever source derived. An accession to wealth, such as the Hawkinses’ punitive damage award, is presumed to be taxable income, unless the taxpayer can demonstrate that it fits into one of the Tax Code’s specific exemptions.

However, purely punitive awards, such as the Hawkinses’, “are not intended to compensate the injured party, but rather to punish the tortfeasor whose wrongful action was intentional or malicious, and to deter him and others from similar extreme conduct.” City of Newport v. Fact Concerts, Inc., 453 U.S. 247, 266, 101 S.Ct. 2748 2759, 69 L.Ed.2d 616 (1981); Punitive damages are not compensation for injury. Instead, they are private fines levied by civil juries to punish reprehensible conduct and to deter its future occurrence. As a result, they were required to pay tax on the $3.5 million punitive damages award.

Even if there is no judgment the IRS will look to the allegations of the suit and the wording of the settlement agreement to determine what part of the settlement agreement was taxable. In Edward Collins v. Commissioner of Internal Revenue, T.C. Summary Opinion 2017-74, Docket No. 16245-15S (9/11/17) the Tax Court, considering the fact that while there may be some ambiguity as to what the parties to the settlement agreement intended to encompass within the meaning of the term “emotional distress”, the taxpayer, Collins, failed to persuade the court. Concluding that the legislative history of section 104(a) states it “is intended that the term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such emotional distress.” H.R. Conf. Rept. No. 104-737, at 301 n.56 (1996), 1996-3 C.B. 741, 1041. Therefore, the fact that a taxpayer suffers physical symptoms from emotional distress does not mean that damages received on account of the emotional distress qualify for exclusion from gross income under section 104(a)(2).  Looking outside the settlement agreement found that even a heart attack and its physical aftereffects constitute physical injury or sickness rather than mere subjective sensations or symptoms of emotional distress. Therefore, one-half of the sum received as noneconomic damages was received on account of physical injury or physical sickness and was, as a result, excludable from the taxpayer’s gross income under section 104(a)(2), the other half of the settlement was not for personal injuries and was taxable.

Similarly, when settlement proceeds compensated a plaintiff for damages she suffered on account of sexual harassment and gender discrimination no portion of the settlement represented damages on account of personal injury or physical sickness. As a result, the plaintiff may not exclude any portion of the settlement payment from gross income. The settlement agreement executed by the parties stated quite clearly what claims the payment was made to settle – namely, the discrimination claims that were the subject of the pending EEOC litigation. The settlement was for claims based on sexual harassment, gender discrimination, and retaliation. The settlement documents nowhere refer to physical injury of any kind. [Michael L. Devine, Jr. And Theresa M. Devine, v. Commissioner of Internal Revenue, United States Tax Court, T.C.  Memo. 2017-111, Docket No. 16329-15 (6/13/17)]

When a settlement was concluded and the amount paid was unallocated among the multiple claims of a taxpayer whose complaints dealt with discrimination, the failure to pay wages, and a hostile work environment rather than physical injuries or physical sickness, the amount received is taxable. Because the basis of the claims in petitioner’s suit relates to the defendant’s failure to pay wages and overtime, failure to provide itemized wage statements, and failure to provide meal and rest periods. As a result, the court concluded that the damages paid petitioner as part of the settlement agreement were mainly for the resolution of claims in her class action lawsuit and not for speculative claims. Therefore, the settlement payment petitioner received as part of the settlement agreement is includible in petitioners’ income for 2009. [Jose M. Dulanto And Ana M. Dulanto v. Commissioner of Internal Revenue, T.C. Memo. 2016-34, Docket No. 19123-12, United States Tax Court, (March 2, 2016)]

In Gary L. Greenberg and Irene Greenberg v. Commissioner of Internal Revenue, T.C. Memo. 2011-18, Docket No. 25420-07. (U.S.T.C. 01/24/2011) the United States Tax Court dealt with a recipient of insurance bad faith punitive damages who tried to avoid tax on the award. The court stated:

The definition of gross income under section 61(a) broadly encompasses any accession to a taxpayer’s wealth. Commissioner v. Schleier, 515 U.S. 323, 327-328 (1995). Therefore, absent an exception by another statutory provision, damage awards from a lawsuit must be included in gross income.

As a result the recipient of the award of punitive damages for the bad faith conduct of their insurer, resulted in a major tax consequence and not the windfall the plaintiffs thought they received. Because the Greenbergs could not convince the Tax Court of their position the Court not only slapped the Greenbergs down in affirming a tax deficiency of over $1 million, but further sanctioned them with an accuracy-related penalty, because the taxpayers had neither substantial authority, nor reasonable cause underlying their posture on the damage award. In assessing the penalty the court stated:

Section 6662(a) and (b)(1) and (2) imposes a 20-percent accuracy related penalty on any underpayment of Federal income tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial understatement of income tax.

Since the punitive award exceeded $2.4 million the Tax Court assessed a penalty, over the tax owed, of $480,000. The court noted that the definition of gross income broadly encompasses any addition to a taxpayer’s wealth. Therefore, absent an exception by another statutory provision, damage awards from a lawsuit must be included in gross income.

In general, exclusions from income are narrowly construed by the tax court. The Greenbergs argued that the punitive damages they received in their insurance bad faith case may be excluded from income under section 104(a)(3) primarily because punitive damages could not have been awarded without the insurance policy. The Tax Court discounted the “but for” argument, and found it was discredited by the Supreme Court’s analysis of section 104(a)(2) in O’Gilvie v. United States, 519 U.S. 79 (1996). In that case the Supreme Court considered an earlier version of section 104(a)(2) that excluded from income “the amount of any damages received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal injuries or sickness”. The Court reasoned that both the statute and the intention of Congress to exclude only those damages that compensate for personal injuries or sickness indicated that the exclusion does not include punitive damages.

The Tax Court noted the clear intent of the law as follows:

Any punitive damages award arguably is made because of some injury and thus would not be awarded “but for” the injury. Punitive damages are for the purposes of punishment, not compensation for “personal injuries or sickness” and therefore do not meet the requirements of the statute.

The Greenbergs claimed to the Tax Court that the punitive damages they received were not punitive, but “bad faith damages”. They contended, without citation to any relevant authority, that “damage awards that serve both to compensate and punish are excludable”. The tax court did not buy the argument because “bad faith damages” are, by definition, “punitive damages” and that the punitive damages they received were ineligible to be excluded because they are not compensating “for personal injuries or sickness.” The Tax Court also noted that the legal fees and costs received in a judgment that correspond to taxable damages are also taxable.

What Does the Insured Get to Keep of a Punitive Damages Award?

Consider an insurance bad faith judgment, like the one obtained by the Greenbergs, where the jury awards the plaintiffs (for ease of calculation) $1,000,000 in compensatory damages and $9,000,000 in punitive damages. The Plaintiffs’ lawyer, in a standard contingency fee agreement, takes 40% of the gross award or $4,000,000 and expenses of $500,000 for experts and other litigation expenses.

The plaintiffs’ share of the recovery is $5,500,000.  If the Plaintiffs live in California or New York they will pay approximately 39% federal income tax and approximately 10% state income tax on their gross earnings in that year. Assuming the Plaintiffs earned nothing in the year of the judgment they are responsible to pay taxes on the $9,000,000 punitive damage award or slightly less than $4,500,000. In essence they receive none of the punitive damage award and the lawyer pays taxes on his $4,000,000 recovery of legal fees. If the plaintiff attempts to avoid paying tax on the punitive damage award they may be assessed a 20% penalty.

The Need for Tax Advice Before Suit or Trial

Most tort lawyers – both plaintiff and defendant – are not knowledgeable about tax consequences. Counsel for plaintiffs who are seeking punitive damages should carefully advise their clients of the tax consequences of the recovery of punitive damages if they know enough or should require that each plaintiff seek the advice of a tax professional before agreeing to proceed with a trial seeking punitive damages.

If the Greenbergs had consulted with tax lawyers and been advised that they would be required to pay the top tax rate on the full amount of punitive damages awarded to them (even though 40% to 50% of those damages were paid as part of the contingency fee agreement with their lawyers), they might have agreed to the defendants’ settlement offers that did not include punitive damages if they could convince the plaintiff to word the settlement agreement as payment for bodily injuries or emotional distress. Both the plaintiffs and the insurer defendant would be agreeable to the settlement to avoid payment of punitive damages and the plaintiffs would be able to keep more of the settlement without incurring a serious tax penalty.

If not brought to the plaintiffs’ attention by their lawyers insurance claims professionals, defense counsel, mediators and settlement judges must make that information available to the plaintiffs. Such information will be a great incentive to avoid trial and a punitive damages award.

Settlement Tactics

If a plaintiff or defendant are trying to settle a bad faith case with claims seeking punitive damages, it is important to advise the defendant and the plaintiff of the tax consequences of the settlement and why a large punitive damages award might cost the plaintiff more than a settlement that only provides compensatory damages. Use of a tax law expert might make possible a settlement that looks impossible because the plaintiff wishes to punish the defendant and may find he is punishing himself.

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Request for a Quote Is Not Insurance

The Most Believable Witness Carries Day

When a person asks an insurance agent or broker to obtain insurance he is merely asking the agent to obtain an offer of insurance from an insurer. No insurance exists until the insurer makes an offer to insure, that offer is accepted and consideration passes. Insurance does not exist just because the prospective insured asked the agent to add a vessel to a marine insurance policy.

Marine insurance is specific and is usually underwritten concerning the specific vessel with the insurer often, if not always, requiring a survey of the vessel.

In J & M Pile Driving, LLC v. Chabert Insurance Agency, LLC, 2017 CA 0126, State Of Louisiana Court Of Appeal First Circuit, (October 25, 2017) the plaintiff appealed the judgment of the trial court that dismissed its suit for damages. The plaintiff, the owner of a vessel, asserted that the defendant insurance agency failed to secure insurance on the vessel before it sank.

FACTS

In August of 2010, the plaintiff, J&M Piling Driving, LLC (J&M), requested a quote for protection and indemnity (P&I) insurance and hull insurance from Chabert Insurance Agency, LLC (Chabert), on a newly-acquired vessel, the M/V Lil Cherie. The M/V Lil Cherie sank on September 21, 2010. J&M learned it had no insurance coverage on the vessel after its claim was denied.

Thereafter, J&M filed suit against Chabert, asserting that it was informed and believed it had full insurance coverage on the M/V Lil Cherie. J&M alleged that Chabert never added the M/V Lil Cherie to J&M’s existing policy as requested and that Chabert was therefore responsible for any and all damages suffered by J&M, including the value of the vessel, personal items on the vessel, salvage of the vessel, and loss of income.

The trial court found that Chabert did not breach its duty to J&M to procure insurance. The court determined that Chabert used reasonable diligence in trying to obtain insurance on the vessel and notifying J&M of the lack of coverage.

ANALYSIS

An insurance agent who undertakes to procure insurance for another has a duty to use reasonable diligence to place the insurance or to promptly notify the client if he has failed to obtain insurance. Because Chabert Insurance Agent Chris Brantley not only failed to obtain insurance – but provided J&M a certificate of insurance – the plaintiff claimed that Chabert breached its duty to procure hull coverage for the M/V Lil Cherie; and because Chabert Insurance Agent Chris Brantley provided a certificate of insurance upon which J&M based its decision to lease the M/V Lil Cherie, the trial court erred by denying J&M recovery under detrimental reliance.

J&M’s representative, Laurachel Soileau, testified at trial, and the trial court had the opportunity to observe her demeanor and evaluate her credibility.

INSURANCE AGENT’S DUTY

An insurance agent has a duty to his client to procure insurance coverage.  The client may recover from the agent the loss he sustains as a result of the agent’s failure to procure the desired coverage if the actions of the agent warranted an assumption by the client that he was properly insured in the amount of the desired coverage.

To recover for losses resulting from an insurance agent’s failure to procure insurance coverage, the plaintiff must establish:

(1)       an undertaking or agreement by the insurance agent to procure insurance;

(2)       failure of the agent to use reasonable diligence to obtain insurance and to notify the client promptly of the absence of coverage; and

(3)       actions by the agent which warranted the client’s assumption that he was insured in the amount of the desired coverage.

In this matter, it is undisputed that J&M owned three vessels between January 16, 2009, and September 21, 2010, and sought hull and P&I insurance for these vessels from Chabert. A policy of insurance for hull and P&I insurance was issued on January 16, 2009, on the first vessel, a steel barge designated as B5, through Essex Insurance Company (Essex), the underwriter. The second vessel, the M/V Laurachel, was purchased in March 2010 and was added to the existing insurance policy after receiving a quote and paying a premium effective March 24, 2010. The third vessel, the M/V Lil Cherie, was purchased by J&M on August 31, 2010, at which time J&M requested Chabert to add the M/V Lil Cherie to the existing policy.

The record establishes that J&M filled out an application for the M/V Lil Cherie and that Mr. Brantley submitted J&M’s application to Chabert’s insurance broker, Southern General Agency (SGA), on August 31, 2010. SGA confirmed the receipt of the application and that it was sent to Essex on September 3, 2010. What is disputed is what happened thereafter.

At trial, Laurachel Soileau, one of the owners of J&M, testified that Mr. Brantley informed her that the M/V Lil Cherie was fully covered when the application was submitted for hull and P&I insurance. According to Ms. Soileau, Mr. Brantley told her that the M/V Lil Cherie would be an add-on to the existing policy, similar to automobile policies.

However, Mr. Brantley testified by deposition that he never indicated to Ms. Soileau that J&M had coverage on the M/V Lil Cherie. He testified that when a client requests insurance coverage on a marine vessel, the client has to fill out an application, which would be submitted to a commercial underwriter, and wait for a premium quote. Mr. Brantley stated that, unlike automobile policies, he could not quote marine insurance in-house. He testified that he did not have binding authority for marine insurance policies and each vessel had to be submitted to the underwriter as new coverage.

According to Mr. Brantley, he was at the mercy of the underwriter. He also testified that it was not until after the quote was received and a premium payment made that coverage became binding.

Mr. Brantley followed up with SGA several times between the date of the filing of the application for the M/V Lil Cherie and the date the vessel sank. Copies of emails admitted into evidence show that he contacted SGA on September 8, September 14, and September 21, 2010. Particularly, the September 14, 2010 email stated: “Any update on the endorsements for this account? Insured is calling me every day to see if I have something for him.” A quote was never received on J&M’s application for the M/V Lil Cherie.

The trial court specifically found Mr. Brantley’s testimony to be more credible than J&M’s witnesses and documentary evidence. The trial court found that Chabert timely processed J&M’s application for insurance coverage and promptly sent the information to SGA for the determination of a quote.

The Court of Appeal could find no manifest error by the trial court in these factual findings. Accordingly, the trial court did not err in finding that Chabert was not responsible for J&M’s losses based on a failure to use reasonable diligence to place the insurance or to promptly notify the client if he failed to obtain insurance.

DETRIMENTAL RELIANCE

To establish detrimental reliance, a party must prove three elements by a preponderance of the evidence: (1) a representation by conduct or word; (2) justifiable reliance; and (3) a change in position to one’s detriment because of the reliance.

The trial court determined that J&M was aware that without a quote and a payment of the premium, the M/V Lil Cherie would not be insured. Additionally, although two certificates of liability insurance were improperly issued by Chabert, the trial court found that J&M could not have reasonably relied upon the certificates of liability insurance for hull coverage.

ZALMA OPINION

The court applied basic contract law and accepted the decision of the trial court – who saw the witnesses testify – which to believe. The trial court believed the agent. The appellate court accepted the belief of the trial court since it only had a cold record. Although the agent had done its duty by asking the underwriter to offer insurance for the vessel, followed-up on its request for an offer, and never told J&M that there was coverage for the vessel. Since no offer of insurance existed from the insurer, since none was accepted and since no premium was paid, there was no coverage for the sinking of the M/V Lil Cherie and judgment was entered in favor of the agent.


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Failure to Disclose Driver Can Be Expensive to Trucker

Unreported Driver Coverage Limited to State Minimum

Motor Truck Liability Insurance is controlled by both state and federal law. Insurers, to protect themselves from excessive liability desire to vet every driver operating a large vehicle by requiring the insured to list every driver using the insureds’ vehicles. When an unreported driver operates a vehicle owned or operated by an insured the insurer limits its liability to state minimums.

In National Independent Truckers Insurance Company, RRG v. Wilner Mathieu d/b/a Mathieu Express, et al., Case No. 8:16-cv-3081-T-27TGW, United States District Court Middle District Of Florida Tampa Division, (October 19, 2017) an insured person attempted to compel the greater federal minimums than the smaller – $300,000 – state limit. As usual both the insured and the claimant desired the higher limits rather than those compelled by the policy and sought help from the District Court.

UNDISPUTED MATERIAL FACTS

Plaintiff issued a commercial motor vehicle insurance policy to Wilner Mathieu d/b/a Mathieu Express (“Mathieu”) applicable for the period of November 18, 2013 to November 18, 2014. Two drivers, Wilner Mathieu and Jean E. Moise, were reported drivers on the policy.

On December 27, 2013, Wilbert Sanon, an unreported driver, was driving a Mathieu owned tractor-trailer rig when he was involved in an automobile accident with a vehicle operated by Arisner Agenor in which Alene Desir was a passenger. At the time of the accident, Sanon was delivering a load from Kissimmee, Florida to Pompano Beach, Florida. This shipment of nonhazardous material was entirely within the State of Florida. And, on the date of the accident, Sanon did not drive a tractor-trailer assembly outside of the State of Florida. The weight of the tractor-trailer rig exceeded 10,000 pounds. And, the gross vehicle weight was 80,000 pounds.

The policy’s Unreported Driver Coverage Endorsement provides:

The limit of insurance provided by this policy with respect to any accident involving an unreported driver to which this insurance applies, including any accident with an uninsured or underinsured vehicle, shall be the minimum liability insurance coverage required under the Motor Vehicle Compulsory or Financial Responsibility Laws of the State having jurisdiction with respect to the issuance of this policy or the State in which the accident occurred if the law of that State requires that its motor vehicle Financial Responsibility Laws must be applied to the accident.

The court was required to apply the clear and unambiguous language of the policy.

DISCUSSION

Plaintiff contends that the undisputed evidence showed that Sanon was transporting nonhazardous materials in intrastate commerce at the time of the accident. Pursuant to the Unreported Driver Coverage Endorsement, the minimum limits of insurance, $300,000, under Florida statutes applies, rather than the minimum limits of insurance of $750,000 required under statutes relating to interstate commerce.

Rather than rebutting Plaintiff’s evidence, the court concluded that Desir merely speculated that the tractor-trailer “was engaged in foreign and interstate commerce” and therefore the minimum limits of $750,000 apply.

The Motor Carrier Act of 1980 addresses financial responsibility for trucking accidents. It applies, with exceptions, to “for-hire motor carriers operating motor vehicles transporting property in interstate or foreign commerce and to motor carriers operating motor vehicles transporting hazardous materials, hazardous substances, or hazardous wastes in interstate, foreign, or intrastate commerce.” It also requires motor carriers registered to engage in interstate commerce to carry a minimum amount of insurance.

The majority of courts considering whether the financial responsibility requirements of the MCA apply initially determine the nature of the transport at the time of the accident.

Rather than disputing the nature of the transport at the time of the accident, Desir conclusively argued that the MCA applies because the “rig was intended to travel outside of Florida and possessed the necessary, federally mandated insurance minimums to conduct such interstate business.” Desir fails to point to any evidence to support her position. It is undisputed that at the time of the accident, Sanon was transporting nonhazardous property in intrastate commerce. Therefore, the financial responsibility requirements of the MCA do not apply.

The Unreported Driver Coverage Endorsement provides that the limit of insurance for accidents involving an unreported driver provides plain and unambiguous language concludes that Florida’s financial responsibility laws applies.

Under Florida statutes the minimum level of combined bodily liability insurance and property damage liability insurance for a commercial vehicle with a gross vehicle weight of 44,000 pounds or more is $300,000. Therefore, because Sanon was an unreported driver on the policy and the Wilner owned tractor-trailer’s gross vehicle weight was 80,000 pounds, the minimum level of combined bodily liability insurance and property damage liability insurance available under the policy for the accident on December 27, 2013 is $300,000.

Accordingly, National Independent Truckers Insurance Company’s Motion for Summary Judgment was granted.

ZALMA OPINION

An insurer can empathize with Ms. Desir’s desire to have available an $450,000 in liability insurance to indemnify her for her injuries. Insurance is not designed to provide empathy or sympathy but to provide the indemnity it promised to provide by the terms of its policy. Here, the court found that the policy wording was clear and unambiguous.


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Don’t Plead Guilty If You Don’t Mean It

Crooked Chiro Pleads Guilty to Insurance Fraud and Then Tries to Take it Back

After Chiropractor John Fortuna admitted that he and his co-defendants knowingly and willfully executed a scheme to defraud the insurers’ health care benefit programs, he pleaded guilty and then 700 days later  moved the USDC to withdraw his guilty plea.

In United States Of America v. John Fortuna, Case No. 1:14CR447, United States District Court Northern District Of Ohio Eastern Division, (October 19, 2017) the USDC was asked to set aside Fortuna’s guilty plea regardless of the fact that when a defendant has entered a knowing and voluntary plea of guilty at a hearing at which he acknowledged committing the crime, the occasion for setting aside a guilty plea should seldom arise.

Although a defendant may withdraw a guilty plea after the court accepts the plea, but before it imposes sentence if the defendant can show a fair and just reason for requesting the withdrawal. To determine whether the Defendant has met this burden, the Court considers a number of factors, including:

(1)           the amount of time that elapsed between the plea and the motion to withdraw it;

(2)           the presence (or absence) of a valid reason for the failure to move for withdrawal earlier in the proceedings;

(3)           whether the defendant has asserted or maintained his innocence;

(4)           the circumstances underlying the entry of the guilty plea;

(5)           the defendant’s nature and background;

(6)           the degree to which the defendant has had prior experience with the criminal justice system; and

(7)           potential prejudice to the government if the motion to withdraw is granted.

The factors listed are a general, non-exclusive list and no one factor is controlling.

ANALYSIS

Fortuna contends that he received poor advice from his prior legal counsel and therefore should be permitted to withdraw his plea. A review of the above factors does not support his request.

Amount of Time Between Plea and Motion

Fortuna pleaded guilty on October 9, 2015. Fortuna did not seek to withdraw his plea until September 9, 2017. The Sixth Circuit has found proper the denials of motions to withdraw on the basis of delays far shorter than the instant case. Fortuna’s roughly 700-day delay weighs heavily against his motion.

Absence of a Valid Reason for Withdrawal

Fortuna did not offer any valid reason for his failure to move to withdraw his plea much earlier in these proceedings. By his own affidavit, Fortuna did not request that his prior counsel seek to withdraw his plea until nearly five months after it was accepted by this Court. Fortuna did not offer any rationale for the delay.

Failure to Maintain Innocence

Fortuna now appears to contend that he is innocent. However, he did not take this position during his plea colloquy. Fortuna admitted to the factual basis contained in his plea agreement that states that he and his co-defendants knowingly and willfully executed a scheme to defraud the insurers’ health care benefit programs. Fortuna admitted that he actively encouraged his patients to undergo MUA procedures in exchange for a $4,000 referral fee for each patient. Fortuna also admitted that he “should have known and ignored a high probability” that his co-defendants would falsely bill for the MUA procedures in order to obtain insurance coverage. Accordingly, Fortuna has not consistently maintained his innocence in this matter.

Circumstances Surrounding the Guilty Plea

Fortuna contends that the decision to change his plea was only discussed within 24 hours of his change of plea hearing. Fortuna also asserts that he was falsely told that all his co-defendants would testify against him and that he would not face more than six months of house arrest. Finally, Fortuna contends that he was not told that he would be a convicted felon.

The Court’s colloquy, however, demonstrates that Fortuna did not hold these beliefs when he entered his plea. First, Fortuna conceded that he had all the time necessary to review the matter with his counsel. Fortuna was next told this crime would result in a felony conviction. He was told all of the civil rights that he could lose as a result of that conviction. Fortuna then admitted that he had ample opportunity to review and discuss the terms of his plea agreement with his counsel. Fortuna also informed the Court that he had not received any promises or assurances to persuade him to plead guilty.

Finally, the Court thoroughly reviewed the plea agreement provisions that discussed the advisory guidelines. The Court noted that all parties would be obligated to recommend a sentence within the advisory range. In so doing, the Court informed Fortuna: “At [offense level] 23, the advisor range could be 46 to 57 months. And the way this agreement reads, in essence, a best case scenario, at offense level 13, could be 12 to 18 months.” Based upon the above, Fortuna could not have held the belief that he would not be subject to a sentence of incarceration. Instead, he was clearly informed that his counsel would be obligated to recommend a sentence between 12 and 18 months in the best possible scenario for him. Similarly, Fortuna was informed that he would be a convicted felon and risked losing numerous civil rights. As such, Fortuna’s plea colloquy undermines his assertions that his counsel gave him faulty advice that warrants withdrawal of his plea.

Fortuna’s Nature and Background

As a licensed chiropractor, there is nothing in Fortuna’s background that would suggest that he did not understand the proceedings before the Court. As such, his nature and background do not support withdrawal of his plea.

Fortuna’s Lack of Experience in the Criminal Justice System

Fortuna did not have any prior experience with the criminal justice system. However, given the level of detail during his plea colloquy, Fortuna’s lack of experience does not weigh strongly in favor of granting his motion to withdraw.

Prejudice to the Government

The Court was familiar with the extensive discovery and documents that would be involved if this matter were to proceed forward to trial requiring production of evidence of every falsely billed service and every individual patient that received a kickback. Now, nearly two years after Fortuna’s guilty plea, the Government would effectively need to begin its trial preparation anew. As such, substantial prejudice would flow to the Government if Fortuna were permitted to withdraw his plea.

None of the factors weigh in favor of granting Fortuna’s motion. Instead, the factors weigh heavily in favor of denial of the motion.

ZALMA OPINION

A defendant does not have an absolute right to withdraw a guilty plea and bears the burden of proving that he is entitled to withdraw his guilty plea for health insurance fraud. United States v. Ellis, 470 F.3d 275, 280 (6th Cir. 2006). In this case a truly guilty chiropractor worked with co-conspirators to defraud insurers and governmental entities. He belongs in jail at the high end of the government guidelines.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

 

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Intentional Manslaughter Not Fortuitous

No Coverage for Intentional Killing

Insurance, by definition a contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event. Therefore, no one can buy insurance against his or her intentional acts. Of course, to a lay person, letting an insurer avoid coverage for an intentional act is worthy of litigation. Therefore, after being convicted on intentional manslaughter, sought coverage for a suit about to be brought by the heirs of the person the insured killed. The insurer, not willing to wait, sued its insureds seeking declaratory relief in State Farm Mutual Automobile Insurance Company v. Zachary Sanders and Charles Mapes, as Parent and Guardian of T.M. Deceased, No. 3:17-cv-137, United States District Court For The Northern District Of Indiana South Bend Division (October 19, 2017). The USDC was asked to compel State Farm to provide coverage for the defense of a suit by the heirs of the deceased.

FACTS

In a tragic case about bad choices — choices that led to life changing consequences for one young man and life ending consequences for another, a 16-year-old boy. The case is really about money, and more specifically, about insurance coverage and whether the imprisoned man is owed a defense and indemnification from an insurance carrier, State Farm, in a threatened civil action by the deceased boy’s father.

The facts are grim. What happened was that 16-year-old T.M. and a friend of his set up a drug deal where they were supposed to sell drugs to Zachary Sanders. Sanders arrived at the agreed upon location — a park in St. Joseph County, Indiana. T.M. and his buddy entered Sanders’ car but instead of engaging in the drug deal, they had another thing in mind. T.M. pulled a gun on Sanders, stuck it at the back of his head and told him to hand over the money. There would be no drug deal; just a robbery. Sanders initially resisted, but with a gun pointed at him, eventually he complied and gave them the money.

T.M. was 16 years old at the time of the robbery; Sanders was 20. After getting the money, T.M. and his friend fled on foot through a large grassy area in the park. Sanders went after them in his car. He floored the accelerator and, traveled approximately 250 feet before running T.M. over and killing him. During the pursuit, Sanders accelerated and turned the car suggesting that he was bent on running T.M. over. An incriminating text recovered from Sanders’ cell phone helps to confirm this. After striking T.M., Sanders fled the scene.

Law enforcement officers were drawn to Sanders after analyzing T.M.’s cell phone which showed contact between the two. A review of Sanders’ phone revealed a smoking gun. As noted above, the day after the incident in the park, Sanders texted a friend telling him that the drug deal did not go down as planned. He explained to his friend that “I didn’t get [the pills] he robbed me But it’s aight (sic) I ran him over when he was running away.” Sanders admitted to the police that he was the one who sent the incriminating text message. He further admitted that he did in fact run T.M. over but, contrary to what he said in his text message, claimed he did it out of panic and fear.

Sanders was charged in state court with voluntary manslaughter. A person commits the crime of voluntary manslaughter when he knowingly or intentionally kills another human being while acting under sudden heat. Sanders was specifically charged with committing the voluntary manslaughter knowingly but not intentionally. At trial, consistent with what he previously told the police, Sanders testified that he acted out of fear. Sanders believed that T.M. was going to shoot him as T.M. was retreating through the field, and that his decision to run T.M. over was done as a “flight response” and “a reaction to the gun.” Sanders also told the jury that he “felt [he] was in danger” and that he “never intended to run [T.M.] over.” The jury disagreed and found him guilty of knowingly killing T.M. while under heat of passion. He was subsequently sentenced to twenty years in the Indiana Department of Corrections, and his conviction was recently affirmed on appeal.

The car that Sanders used to run T.M. over was owned by his grandmother and insured by State Farm. T.M.’s father, Charles Mapes, has threatened a lawsuit against Sanders. To that end, Mapes’ counsel has inquired whether State Farm intends to defend and indemnify Sanders. State Farm responded with this declaratory judgment action. The pertinent policy covers liability claims against an insured who causes bodily injury by an “accident.” The policy also specifically excludes coverage for an “INSURED WHO INTENTIONALLY CAUSES BODILY INJURY . . .”

The issue before me is whether Sanders’ voluntary manslaughter conviction for “knowingly” killing T.M. means it wasn’t an “accident” and, alternatively, whether the summary judgment record establishes that Sanders’ actions were intentional thus precluding coverage under the policy exclusion for damage caused by intentional actions of the insureds.

ANALYSIS

The substantive law applicable to this case is the law of the State of Indiana. The interpretation of an insurance policy, like other contracts, is typically a question of law that a trial judge can resolve on summary judgment. When interpreting an insurance policy, the court’s goal is to ascertain and enforce the parties’ intent as reflected in the insurance contract.

If the policy language is clear and unambiguous, it should be given its plain and ordinary meaning. However, ambiguous terms in the contract are to be construed against the insurer, especially where the policy excludes coverage.

An insurance company’s duty to defend is broader than its duty to indemnify but is not unlimited. If there is even a possibility of coverage, the insurer is obligated to defend. In this case, there is no underlying state court complaint to review.

In Indiana extrinsic, designated evidence when analyzing an insurer’s duty to defend. Importantly, the defendants have neither objected to nor moved to strike any of State Farm’s designated evidence. Under Indiana law, a conviction in a criminal case is admissible as evidence in a subsequent civil proceeding. A conviction can have collateral estoppel effect; it can be used in an offensive way provided the defendant had a full and fair opportunity, and the appropriate incentive, to vigorously litigate the matter in the first action.

The court concluded that it is plain that Sanders had an incentive to vigorously argue in his criminal case that he did not knowingly run T.M. over. His freedom was at stake. He took the stand at the trial and tried to convince the jury that he was innocent of any wrongdoing. But the jury rejected his position and found him guilty of knowingly running T.M. down with his car — a voluntary manslaughter. Because that issue has been decided after Sanders had a full and fair opportunity to contest the matter in his criminal trial, he is now estopped from claiming that he did not knowingly run T.M. over. T.M.’s father did not have a full and fair opportunity to litigate this issue in Sanders’ criminal trial and so cannot now be estopped from litigating the issue of Sanders’ intent.

Because State Farm’s contractual duty runs only to Sanders, Mapes can recover insurance proceeds only insofar as his rights derive from Sanders’ rights under the insurance policy. Thus, Mapes is relegated to standing in Sanders’ “legal shoes,” and his claim can be no greater than Sanders’ own claim would be under the policy. Sanders is estopped from asserting that his acts were not knowingly, and so Mapes, standing in Sanders’ “legal shoes,” also may not assert that Sanders’ acts were not done knowingly.

Based on the evidence submitted in support of summary judgment, it was plain to the court that Sanders acted intentionally. The evidence presents a compelling case that Sanders intended to run T.M. over. Sanders traveled 250 feet before hitting T.M. with his car. He made turns suggesting he was trying to hit him, and there was evidence that he accelerated as well. The most convincing evidence is the text Sanders sent the next day. He told his friend the drug deal didn’t go down and that he ran him over when he was running away. That certainly suggests that Sanders “ran him over” intentionally. In the face of this evidence, no rational jury could find by a preponderance of the evidence that Sanders didn’t act intentionally, especially since another jury rejected the same position under the more exacting beyond a reasonable doubt standard applicable in criminal cases.

When Sanders knowingly ran T.M. over that necessarily means that it wasn’t an accident as defined in the policy of insurance. What he did was neither a contingent or unknown event. It was a certain, known and intentional act. Also, the exclusion in the policy for intentional actions applies because no reasonable jury could find that Sanders acted unintentionally when he ran T.M. over. Therefore, the killing was not fortuitous and the killing was clearly and unambiguously excluded.

ZALMA OPINION

The court made clear that an intentional act that resulted in a 20-year sentence for a young man who intentionally ran over a 16-year-old who had robbed him at gunpoint, was obviously not fortuitous, was intentional and was excluded. Since he is serving a 20-year sentence the chance of Mapes getting any damages from him without State Farm’s money, is nil. The tort did good and refused to force State Farm to do something it had not agreed to do.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Duty to Defend Is Not Absolute

Do Not Refuse to Accept an Offer of Defense Without Reservation Unless You Have Evidence of Conflict

It is axiomatic that the duty to defend is broad and that a liability insurer must defend its insured if there is a potential for coverage. However, the duty is not controlled by the insured but by the facts and the insurer.

If an insured wishes to retain its own counsel and control its defense it has the right to do so but does not have the right to compel an insurer to pay for the cost of defense unless there is a reservation of rights issued that raised a conflict of interest between the insured and the insurer such that an independent counsel paid for by the insurer is required.

In OneBeacon America Insurance Company v. Celanese Corporation, No. 16-P-203, Appeals Court of Massachusetts, November 18, 2016, (October 16, 2017) OneBeacon agreed to defend Celanese without reservation and, in accordance with the policy wording, insisted on retaining counsel of its choice and that it control the defense. Celanese refused. A declaratory relief action was filed and the trial court found OneBeacon was entitled to control the defense and choose counsel, but ordered it to pay the independent counsel for the period while the dispute continued.

The issue on appeal was whether that determination precludes Celanese from receiving any reimbursement for defense of the underlying claims during the period of time when the question of control over the defense was being litigated

BACKGROUND

Over the years, Celanese has been subject to numerous legal actions involving claims of bodily injury from asbestos and chemicals allegedly contained in Celanese’s products or facilities. In an effort to seek coverage under its insurance policies in April, 2009, Celanese sent a letter to OneBeacon stating that it was terminating the parties’ then-existing defense cost-sharing agreements and demanding that OneBeacon instead defend the ongoing asbestos and chemical product injury claims under its original general liability policies.

In response to Celanese’s letter, OneBeacon agreed to defend Celanese against the underlying asbestos and chemical product injury claims without a reservation of rights. To this effect, OneBeacon offered to waive any issues of coverage and to indemnify Celanese from any settlements or judgments up to its full liability limits. However, OneBeacon also sought to assume full control of Celanese’s defense of these claims.

In response, Celanese refused to cede its control of the defense or replace the counsel it had employed for the past fourteen years with the representation selected by OneBeacon.

The judge further referred the issue of the amount of reasonable and necessary legal fees to a special master, and ultimately awarded Celanese $2,435,921.49 in attorney’s fees, plus prejudgment interest from May 27, 2011, to May 31, 2013.

DISCUSSION

Whether OneBeacon is liable for the defense costs incurred by Celanese is dependent on the answer to four questions:

(1) Does OneBeacon have the right to control Celanese’s defense if OneBeacon has offered to defend without a reservation of rights?

(2) Does Celanese have the right to refuse OneBeacon’s control of the defense if a sufficient conflict of interest exists?

(3) Does a sufficient conflict of interest exist? and

(4) Is OneBeacon liable for defense costs where Celanese has refused OneBeacon’s control of the defense?

Insurer’s Defense Without A Reservation Of Rights

Massachusetts courts have not explicitly commented on an insurer’s rights in seeking to defend an insured without a reservation of rights. However, such rights are logically inferred from Massachusetts case law that discusses the rights and limitations of an insurer’s defense under a reservation of rights.

In Massachusetts, “[w]hen an insurer seeks to defend its insured under a reservation of rights, and the insured is unwilling that the insurer do so, the insured may require the insurer either to relinquish its reservation of rights or relinquish its defense of the insured and reimburse the insured for its defense costs” (emphasis added). Herbert A. Sullivan, Inc. v. Utica Mut. Ins. Co., 439 Mass. 387, 406-407 (2003).

OneBeacon offered to defend Celanese against the remaining asbestos and chemical product injury claims without a reservation of rights. In offering to defend Celanese without a reservation of rights, OneBeacon has the right to control Celanese’s defense of those claims. The right to control Celanese’s defense includes the authority to choose the counsel who will defend the claims and to make other decisions related to control of the defense that would traditionally be vested in the insured, as a named party in the case.

Insured’s Right To Justifiably Refuse Insurer’s Control Of Defense When A Sufficient Conflict Of Interest Exists.

While OneBeacon has a right to control Celanese’s defense as a result of its offer to defend without a reservation of rights, such right is not absolute.

Has Celanese Demonstrated That A Sufficient Conflict Of Interest Exists?

Celanese argued that OneBeacon’s defense did not satisfy its duty to defend because it made a “conditional offer [that] required Celanese to terminate . . . counsel [that had been representing Celanese] in these types of chemical cases for the past fourteen years.” Despite Celanese’s contentions, OneBeacon’s offer did not demand the type of extra-contractual conditions that courts have recognized as resulting in a conflict of interest. Instead, OneBeacon offered to defend Celanese without a reservation of rights and notified Celanese that it would choose the attorney that would conduct that defense. This is the type of authority that is inherent in the insurer’s control of the defense as a part of its duty to defend and in accordance with the conditions of the policy.

As with any contract, in interpreting an insurance policy, the court begins with the plain language of the policy. OneBeacon’s general policies explicitly provide that OneBeacon will “defend any suit against [Celanese] alleging bodily injury or property damage, even if such suit is groundless, false or fraudulent; but [OneBeacon] may make such investigation, negotiation and settlement of any claim or suit as it deems expedient.” Here, the risk assumed by OneBeacon solely concerned claims of “bodily injury or property damage” against Celanese, and nothing more.

Protecting Celanese’s reputation was not something that OneBeacon was required to insure or defend. The insurance policies allow OneBeacon to seek out settlements instead of defending Celanese’s reputation by trying each case and denying Celanese’s liability. Here, significantly, Celanese did not obtain insurance for the defense of its reputation.

Celanese did not demonstrate that a sufficient conflict of interest existed. It unjustifiably refused OneBeacon’s offer to defend without a reservation of rights.

Insured’s Refusal Of Insurer’s Control Of Defense

Despite finding that Celanese had failed to demonstrate that a sufficient conflict of interest existed, the judge concluded that OneBeacon was liable to pay for the defense costs that Celanese incurred from April 13, 2009, when it refused OneBeacon’s control of the defense and hired its own counsel, through May 27, 2011, when the judge ruled against Celanese on this point. The Appeals Court concluded that the trial court’s action was contrary to authority commenting on an insured’s unjustified refusal of an insurer’s right to control the defense when defending without a reservation of rights.

CONCLUSION

Celanese rejected OneBeacon’s offer to defend without a reservation of rights and conducted its own defense because it believed that its own attorney would provide a better defense. That was Celanese’s right. However, absent a sufficient conflict of interest on the part of OneBeacon, Celanese lost its right to obtain reimbursement for defense costs when it refused to accept OneBeacon’s defense. Having rejected the insurer’s defense without a sufficient conflict, the insured lost its right to recover the costs of that defense.

An insurer should not have to pay for the attorney fees incurred by the insured after the insured has wrongfully rejected the defense tendered by the insurer. Therefore, OneBeacon satisfied its duty to defend by offering to defend Celanese without a reservation of rights. Celanese’s unjustified refusal of OneBeacon’s control of that defense resulted in OneBeacon being found not liable for the attorney’s fees that Celanese incurred in conducting its own defense.

ZALMA OPINON

Celanese was offered a defense and indemnity up to the limit of OneBeacon’s policy without reservation or claim of coverage defense. Wishing to protect its reputation rather than its assets, Celenese refused and claimed that OneBeacon was required to pay counsel of its choice without any evidence of a conflict of interest. In so doing it lost more than $2.5 million in defense costs plus the costs of defense and indemnity that continued.


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Don’t Change Your Mind After Accident

Waiver of Stacking UM/UIM Cover Upheld

Insurance is a contract. An insured saves money by agreeing to limit the coverage available because the insured does not believe it would be needed. Only after an accident does an insured reconsider the decision and then tries to get a court to change the decision so that, in the case of UM/UIM coverage, the insured can get more money than the coverage purchased.

In Michele DeCrosta v. Erie Insurance Group, J-A19044-17, No. 2982 EDA 2016, Superior Court Of Pennsylvania, (OCTOBER 18, 2017) DeCrosta asked the court to ignore her waiver of UM/UIM stacking after an accident.

FACTS

DeCrosta sued Erie seeking to recover stacked uninsured and underinsured (“UM/UIM”) motorist benefits under the automobile insurance policy issued to her by Erie (“Policy”), which insured two vehicles DeCrosta owned. DeCrosta has held a Policy with Erie from approximately July 1990 to the present. DeCrosta was injured in an automobile accident in February 2012. Neither party disputes that DeCrosta’s Policy with Erie required Erie to indemnify DeCrosta for underinsured motorist coverage. The dispute between the parties arose when DeCrosta submitted the claim requesting stacked UM/UIM coverage.

The Policy reflects unstacked automobile insurance at the time relevant to the accident. Erie asserts, and DeCrosta admitted in her deposition, that DeCrosta signed a Waiver of Stacking Underinsured Motorist Coverage Limits form. The parties dispute whether the date handwritten on the document, September 17, 2004, was written by DeCrosta.

The dispute between the parties circles around the validity of the waiver, and the continued application of that waiver through the removal of Auto #2 from the Policy, and the addition of Auto #3 to the Policy.

The trial court granted Erie’s Motion for Summary Judgment and entering judgment in favor of Erie. DeCrosta appealed.

ISSUES

DeCrosta stated the issues to be:

  1. Whether a material issue of fact exists concerning an unrelated, non-stacking waiver [of insurance coverage]?
  2. Whether or not the substitution of a Chevrolet Malibu for a Chevrolet Camaro constituted a “replacement vehicle” per the terminology of the applicable insurance Policy?

DISCUSSION

Specifically, DeCrosta points out that the waiver was purportedly hand-dated by an anonymous person, and contends that “there is no evidence whatsoever produced by Erie … concerning the validity of the anonymous dating of same.”

As a matter of statutory interpretation a court may not insert into a statute a word or requirement that does not exist in the statute.

Under Pennsylvania statutes, to be a “valid,” a UM/UIM stacked insurance waiver form must be signed, but not necessarily dated, by the insured. A court may not insert a requirement that the insured “sign and date” into the statute when the statute only required that it be signed.

It is undisputed that DeCrosta signed the waiver. Accordingly, the trial court did not err in ruling that the waiver is valid, and that its validity did not hinge upon who dated the document. The only logical purpose for a date is to eliminate disputes about when such a waiver was effective. Thus, DeCrosta’s first issue does not entitle her to relief.

In her second issue, DeCrosta contends that a disputed issue of material fact exists concerning the addition of Auto #3 to the Policy. Specifically, DeCrosta argues that, contrary to the trial court’s determination, Auto #3 did not constitute a “replacement vehicle,” which thereby required Erie to present DeCrosta with the opportunity to execute a new UM/UIM stacking waiver, but was a new vehicle.

To determine whether an insurer is obligated to have an insured sign a new UM/UIM stacking waiver following the addition of a new vehicle to an automobile insurance policy, the Court must focus on the following: “1) how was the ‘new’ vehicle added to the existing policy; and 2) what is the specific language of the relevant clause(s) in the applicable insurance policy?”

In the instant case, there were two vehicles on DeCrosta’s Policy as of the date she signed the waiver, and thereafter, there were never more than two vehicles on the Policy. As she merely replaced Auto #2 with Auto #3, Erie did not have to obtain from DeCrosta a new UM/UIM waiver. Finally, there is no merit to DeCrosta’s bald claim that the Policy provision defining “replacement auto” was somehow ambiguous.

Accordingly, the appellate court concluded that the trial court did not err in determining that there is no material issue of fact insofar as this claim is concerned.

ZALMA OPINION

Any person insured is entitled to recover all of the benefits of the policy. The person insured is not entitled to recover benefits not called for by the policy. Therefore, no one can buy a policy of fire insurance to cover a fire that happened before the fire occurred nor can a person obtain stacking of UM/UIM coverage without ordering and paying a premium for the coverage. Courts should punish people who try with more than an order denying coverage.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Workers’ Compensation Policy Does Not Cover Defense of Third Parties

No Cover for Liability Assumed by Contract

Workers’ Compensation is required by statute to provide coverage to employees who are injured in the course of employment without a need to prove liability, negligence or any other tort. Workers’ Compensation policies also provide Employer’s Liability insurance that intends to cover the employer’s liability to third parties under certain limited circumstances.

In New Hampshire Insurance Company v. JVA Industries Inc., Taconic Builders, Inc., CPW Park Views, LLC, New York Marine And General Insurance, Everest National Insurance Company and Luis Cruz, Index NO. 155525/2016, Supreme Court Of The State Of New York County Of New York: Part 43, 2017 NY Slip Op 32148(U)  (October 12, 2017) New Hampshire Insurance Company moved the court for an order awarding it summary judgment. New Hampshire’s suit sought a declaration that it had no duty to defend or indemnify any party in connection with the underlying personal injury action entitled Luis Cruz v Taconic Builders, Inc. v JVA Industries, index No. 307751/2010 (Sup Ct, Bronx County).

New Hampshire also moved for an order entering a default on the non-appearing parties, defendants JVA Industries, Inc. (JVA) and Luis Cruz (Cruz).]

FACTS

The underlying action was commenced by Cruz against, inter alia, defendants Taconic Builders, Inc. (Taconic) and CPW Park Views, LLC (CPW), seeking money damages for personal injuries sustained as a result of a construction site accident  at 15 Central Park West, New York, New York (the Premises). CPW owned the Premises, and Taconic was the general contractor of the construction project at the Premises. Cruz was employed by JVA, a subcontractor, at the time of the accident. Cruz alleges that, on the day of the accident, he fell from a ladder while working at the Premises.

Taconic and CPW sued JVA seeking (1) common law indemnification; (2) contribution; (3) contractual indemnification; and (4) breach of contract to procure insurance.

Cruz sustained personal injuries to his back, including a herniation of the L3-L4 disc, a herniation of the C3-C4 disc, and a fractured right ring finger. Cruz also alleges that he has sustained a “head injury, concussion, post concussive syndrome [and] post traumatic mood disorder”.

New Hampshire issued a policy of Workers’ Compensation and Employers’ Liability Insurance to JVA, policy number WC 009-87-2033. Insurance, coverage is specifically excluded for “liability assumed under a contract”.

Chartis Claims, Inc. (Chartis), the claim administrator handling claims under the New Hampshire policy, wrote to JVA regarding the claims in the underlying action and the third-party action commenced by Taconic. Chartis advised JVA that it would participate in JVA’s defense against the claims in the underlying action and in the first third-party action, subject to a reservation of rights and partial disclaimer of coverage. Specifically, plaintiff reserved its rights to disclaim coverage under the exclusion in Coverage Part Two for all claims based on liability assumed under a contract.

Eventually New Hampshire sued. The complaint contains four causes of action, each seeking a declaration that plaintiff has no duty to defend or indemnify JVA for the causes of action for contractual indemnification (first cause of action), common law contribution (second cause of action), common law indemnification (third cause of action) or breach of contract to purchase insurance (fourth cause of action), as set forth in the first and second third-party complaints in the underlying action.

Neither JVA nor Cruz has properly appeared in this action, and are now in default.

DISCUSSION

With respect to the claims for contractual indemnification (first cause of action) and breach of contract to purchase insurance (fourth cause of action), the New Hampshire policy contains an exclusion for “liability assumed under a contract.” Accordingly, New Hampshire has no duty to defend or indemnify any party in relation to the claims for contractual indemnification, and breach of contract to purchase insurance since the policy explicitly excludes coverage for any liability assumed under a contract. Further, New Hampshire is not required to either defend or indemnify defendant for the contractual indemnification or breach of contract causes of action.

Plaintiff is clearly entitled to a declaration that it owes no coverage to any party in the underlying action for these claims. With respect to the claims for common law contribution there is no coverage for such claims under an Employers’ Liability policy like the one issued by plaintiff.

Here, the principal injuries alleged in the bill of particulars are a fractured ring finger and back injuries, which do not qualify as “grave injuries” within the meaning of § 11 of the Workers’ Compensation Law and there is no allegation that Cruz permanently and totally lost the use of his arm or hand.

Cruz, who is currently working, could not have sustained a “grave injury.” Hence, plaintiff is entitled to a declaration that the injuries sustained by Cruz do not qualify as “grave injuries” within the meaning of Workers’ Compensation Law § 11, and that, accordingly, plaintiff has no obligation to defend or indemnify [defendants] for the underlying common-law indemnification and contribution claims.

New Hampshire’s motion for the entry of a default judgment against defendants JVA Industries Inc. and Luis Cruz was granted, and the Clerk is directed to enter judgment on the complaint in favor of plaintiff and against said defendants; and the motion for summary judgment was granted and it was ordered that that New Hampshire has no duty to defend or indemnify any party in connection with the underlying personal injury action entitled Luis Cruz v Taconic Builders, Inc. v JVA Industries.

ZALMA OPINION

When a court is faced with an insurance coverage dispute it must read the insurance policy as written. In this case the policy clearly and unambiguously excluded coverage for any liability assumed under a contract. Since the only claim against New Hampshire’s insured was for a liability assumed under a contract there was no coverage for defense or indemnity.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://zalma.com/zalma-books/

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/bzalma  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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When is an Appraiser Disinterested?

What is “Competent and Disinterested”?

California Insurance Code, at § 2071 provides a method by which an insured and insurer may quickly, and informally, resolve disputes concerning the amount of loss. Although called “appraisal” it is really a contractual arbitration agreement mandated by statute where the court is required to treat the award of the appraisers and umpire in the case at bench as a confirmed award in arbitration.

Therefore, when an insurer and its insured fail to agree on the amount of loss following a fire, the California Insurance Code allows each of them to select a “competent and disinterested appraiser,” who are in turn required to agree on a “competent and disinterested umpire” (or request appointment of one by the court) to form a three-member panel to adjudge the amount of loss. The award of the appraisers will be treated as an award of arbitrators and when confirmed will be an enforceable judgment of the court.

California courts have concluded this adjudication must be conducted pursuant to the provisions of the California Arbitration Act, Code of Civil Procedure section 1280 et seq. (Arbitration Act).

Section 1281.9 of the Arbitration Act requires proposed neutral arbitrators to disclose to opposing parties the existence of any potential grounds for disqualification. If a party objects to the proposed neutral arbitrator, section 1281.91 requires the objecting party to serve a notice of disqualification within 15 days of receipt of the disclosure statement.
Do the disclosure required by the Arbitration Act and its disqualification provisions apply only to the jointly proposed umpire in a loss appraisal proceeding or also to the “competent and disinterested” appraisers unilaterally designated by the parties?

If they do not apply, under what circumstances may a party to the appraisal proceeding disqualify an opposing party appraiser for cause?

In Mahnke v. Superior Court of Los Angeles County, 180 Cal.App.4th 565, 103 Cal.Rptr.3d 197 (Cal.App. Dist.2 12/21/2009) the Court of Appeal resolved an issue of disqualification and allowed a party-selected appraiser who disclosed a potential conflict in favor of allowing the appraiser to serve. The Mahnke court explained:

Party-selected appraisers, however, have been treated differently from party arbitrators due to Insurance Code section 2071’s specification that each party select a “competent and disinterested appraiser.” This requirement, incorporated into every fire insurance policy issued in California, in effect constitutes a contractual agreement between the parties to select neutral appraisers. … As the Gebers [Gebers v. State Farm General Ins. Co. (1995) 38 Cal.App.4th 1648]court explained, “current or prospective financial dealings with a party are well recognized as grounds for an arbitrator’s disqualification.” (Gebers, at p. 1653.)

The insurer, California FAIR Plan Association (CFPA), sought to disqualify the party appraiser selected by their insureds, Peter and Patricia Mahnke. The trial court granted CFPA’s petition, concluding that section 1281.9’s disclosure and disqualification standards that required “requires a proposed neutral arbitrator to disclose: “(1) The existence of any ground specified in Section 170.1 for disqualification of a judge” and that it applied to party-selected appraisers. The Mahnkes’ party-appraiser’s retention as an expert witness by another client of the Mahnkes’ counsel was an impermissible conflict of interest requiring his disqualification.

The Court of Appeal disagreed with the superior court’s analysis on both points and granted the petition for writ of mandate filed by the Mahnkes and directed the superior court to vacate its order disqualifying the party appraiser and to enter a new order denying CFPA’s petition to disqualify him.

Factual and Procedural Background

After the Mahnkes’ home was severely damaged in the November 2008 Sylmar wildfires, they tendered a claim to CFPA. CFPA acknowledged coverage, adjusted the claim and offered payment. The Mahnkes did not agree with CFPA’s assessment of their damages and elected to proceed under the appraisal provision of the policy.

On January 26, 2009 the Mahnkes served CFPA with notice of this election and their choice of Robert McConihay to serve as their appraiser. The next day CFPA responded with the name of the appraiser it had selected, William Bruce Reid. On February 9, 2009 Mr. Reid mailed a disclosure statement indicating his own lack of financial interest in the outcome of the appraisal and disclosing he was currently serving as CFPA’s designated appraiser in another pending action. In a letter dated February 11, 2009 the Mahnkes’ counsel responded, “[t]hough we are unaware of a requirement to make the disclosure . . . your appraiser has made, out of courtesy we will do the same.” Mr. McConihay’s disclosure statement asserted he lacked any financial interest in the outcome of the proceeding and had no previous dealings with the parties. The declaration disclosed, however, he was currently engaged as a construction expert for another client of the law firm representing the Mahnkes. The letter also attached his resume, which recounted his professional experience and included the names of 14 lawyers, including the Mahnkes’ counsel, as references.

The Appraisal Provision of Insurance Code Section 2071

Fire insurance policies on California properties have long been required to use standard language specified by the Legislature. Among other policy provisions, in the event the insurer and the insured disagree about the amount of loss, Insurance Code section 2071provides a method by which their differences may be resolved, called “appraisal.” Each party is required to select “a competent and disinterested appraiser,” who together must then select (or, if the party-selected appraisers cannot agree, have the court appoint) “a competent and disinterested umpire.” The party-selected appraisers are each required to appraise the loss and, in the event of disagreement, submit their differences to the umpire for adjudication.

The “Appraisal” provision in the current version of the statute has remained largely unchanged since it was first enacted in 1949. In particular, the terms “competent and disinterested appraiser” and “competent and disinterested umpire” appear in the original, 1949 legislation. Amendments in 2000 insisted that the appraisal process be “informal.”
Notwithstanding this statutory direction to maintain the informality of appraisal proceedings, in general those proceedings must also conform to the procedural requirements of the Arbitration Act.

The Disclosure and Disqualification Provisions of the Arbitration Act

Courts have long struggled with the problem of ensuring not only the neutrality but also the perception of neutrality of arbitrators, who wield tremendous power to decide cases and whose actions lack, for the most part, substantive judicial review. It is difficult to conceive a way in which the effectiveness of the arbitration process will be hampered by the simple requirement that arbitrators disclose to the parties any dealings that might create an impression of possible bias. The Legislature, by the Arbitration Act, requires such disclosure.

However, insurance appraisals are not run-of-the-mill arbitrations. As one court explained, “bias in a party arbitrator is expected and furnishes no ground for vacating an arbitration award, unless it amounts to ‘corruption.’” Party-selected appraisers have been treated differently from party arbitrators due to section 2071’s specification that each party select a “competent and disinterested appraiser.” This requirement, incorporated into every fire insurance policy issued in California, in effect constitutes a contractual agreement between the parties to select neutral appraisers.

Even if the evidence tends to establish that no actual bias, prejudice, influence, or fraud was disclosed on the part of the umpire, public policy and an unconscious predilection to favor one’s interest renders an arbitrator, directly or indirectly interested in the result of the arbitration, partial, incompetent, and disqualified.

For instance, in Gebers v. State Farm General Insurance Co. (1995) 38 Cal.App.4th 1648 (Gebers) the court concluded party-selected appraisers are held to a higher standard of impartiality than are party arbitrators precisely because of this legislative mandate. Because the insurer-selected appraiser in Gebers had a direct pecuniary interest in ongoing litigation work for State Farm, the court vacated the underlying arbitration award based on the appraiser’s presumed bias. A similar finding was made in Figi v. New Hampshire Ins. Co. (1980) 108 Cal.App.3d 772, 776-778 where an arbitration award was vacated based on a disinterested umpire’s failure to disclose ongoing business relationship between himself and insurer’s designated appraiser.

Section 1281.9 now imposes disclosure requirements on a “proposed neutral arbitrator.”
The term “proposed neutral arbitrator,” in turn, is defined in section 1280, subdivision (d), as one “who is (1) selected jointly by the parties or by the arbitrators selected by the parties or (2) appointed by the court when the parties or the arbitrators selected by the parties fail to select an arbitrator who was to be selected jointly by them.”

The statutory scheme now imposes a disclosure obligation exclusively on the “proposed neutral arbitrator” who, like the “umpire” contemplated in Insurance Code section 2071, is either selected jointly by the parties and their respective party arbitrators or appointed by the court upon the failure of the parties to agree. The Court of Appeal concluded:

The disclosure requirements in section 1281.9 and the Judicial Council’s Ethics Standards for Neutral Arbitrators do not apply to any arbitrator other than the jointly selected, or court-appointed, proposed neutral arbitrator-or, in the case of a contested appraisal proceeding, the competent and disinterested umpire.

So long as the proposed neutral umpire is subject to the Arbitration Act’s disclosure and disqualification requirements, subjecting the party-selected appraisers to the same obligations and limitations is inconsistent with the spirit of the Legislature’s amendments.

Party-Selected Appraisers May Be Disqualified When a Substantial Business Relationship Exists Between the Appraiser and a Party

The interest or bias that disqualifies an arbitrator or appraiser must be direct, definite, and demonstrable as contrasted with remote, uncertain, or speculative. The key to disqualifying a party appointed appraiser is whether there is a “substantial” business relationship between the party appointed appraiser and a party to the appraisal, their counsel, or the umpire. Impartial arbitrators/appraisers must disclose to the parties any dealings that might “create an impression of possible bias.” The test is whether a reasonable member of the public at large, aware of all of the facts, would fairly entertain doubts concerning the arbitrator’s/appraiser’s impartiality, the arbitrator/appraiser is not subject to disqualification.

In Banwait v. Hernandez (1988) 205 Cal.App.3d 823 (Banwait), also cited by appellants, the arbitrator failed to disclose that he had once been represented as a client by the law firm representing the insurer in the underlying arbitration. The trial court found that the prior representation did not constitute a substantial business relationship, but nevertheless vacated the arbitration award. The Court of Appeal reversed. The Banwait court noted that California appellate courts had uniformly held that Commonwealth should govern the application of subdivisions (a) and (b) of section 1286.2. (Banwait, supra, at p. 828.) However, it found that the trial court’s findings precluded any conclusion that the arbitrator was corrupt or biased, thus there was no basis for setting aside the award.

A relationship where there exists a present or past business relationship between the arbitrator and a party, its counsel or a witness can suggest a pecuniary interest on the part of the arbitrator or that the arbitrator will place unusual trust or confidence in the party with whom the relationship existed. If the arbitrator provides a reason that would lead a reasonably prudent person to favor the party for reasons wholly unrelated to the merits of the arbitration, the arbitrator/appraiser may be disqualified if the business relationship is substantial.

An arbitrator cannot be expected to provide the parties with his complete and unexpurgated business biography. It is enough for the purposes of an appraisal to require that where the arbitrator has a substantial interest in a firm which has done more than trivial business with a party, that fact must be disclosed.

Mr. McConihay affirmed in his disclosure that he had no financial interest in the underlying dispute between the Mahnkes and CFPA. Regardless, it is presumed that he is being compensated by the other client, just as the Mahnkes are responsible for compensating him in their proceeding. Although compensation for services is often relevant to the question of ability to serve impartially, it is not determinative in this instance because any party-selected appraiser will necessarily be paid by the retaining party. Since most arbitrators are drawn from business and professional ranks, and are not full-time judicial officers with public responsibilities, to attract and obtain the most capable among them, a court should not demand divestment of all interests or withdrawal from all activities prohibited to judicial officers. Therefore, the arbitrator/appraiser may serve if the financial relationship is not substantial and must be more than the fact that he or she is being paid for services rendered.
The court concluded that:

Imposing overly rigorous standards on party-selected appraisers in informal proceedings under Insurance Code section 2071 would be both short- sighted and naïve about the realities of modern litigation practices. Viewed as a whole, Mr. McConihay’s resume demonstrates that he possesses experience qualifying him to act as a “competent” appraiser and that his broad client base distinguishes him from those professionals who regularly perform services for particular clients (or attorneys) and become financially dependent on them. Viewed from the standpoint of a reasonable member of the public, we see nothing that warrants Mr. McConihay’s disqualification.

A peremptory writ of mandate was issued directing the superior court to vacate its order granting CFPA’s petition to disqualify Mr. McConihay and to enter a new order denying the petition.

CONCLUSION

A person or insurer entering into an appraisal proceeding should find the Mahnke decision to broaden the field of available appraisers and limit the ability of either party to disqualify a party appointed appraiser.

 


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

National Underwriter Company publishes the  Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972.

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma and at his web site: http://www.zalma.com.

 

Legal Disclaimer:

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

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No Good Deed Goes Unpunished

Pay the Premium or Lose Coverage

States across the U.S. have passed statutes regulating the cancellation of insurance policies. The statutes impose strict notice to the insured and how cancellation for failure to pay premium can be cured.

In Anthony Chenevert And Cindy Langwell v. Allstate Property And Casualty Insurance Company, 17-561, State Of Louisiana Court Of Appeal, Third Circuit (October 11, 2017) the state of Louisiana enacted such a statute that a trial court applied strictly requiring the notice to be in the exact language of the statute.

Allstate Property and Casualty Insurance Company (Allstate), sought supervisory writs from the judgment of the Twelfth Judicial District Court, Parish of Avoyelles, the Honorable Kerry Spruill presiding, which denied Allstate’s motion for summary judgment on the issue of insurance coverage.

STATEMENT OF THE CASE

An automobile accident occurred on October 15, 2015, involving plaintiffs, Anthony Chenevert and Cindy Langwell, and a vehicle driven by Rodney Lee Johnson, Jr., but owned by Katelin Firmin. Chenevert and Langwell filed suit against Allstate, alleging it provided coverage to Mr. Johnson under its policy issued to Ms. Firmin. Allstate filed its motion for summary judgment, asserting that coverage was not in place for Ms. Firmin or Mr. Johnson on the date of the accident because the policy previously issued to Ms. Firmin had been cancelled due to non-payment of her insurance premium on September 15, 2015.

Notice Of Non-Payment of Insurance Premium

Ms. Firmin by automatic bank transfer forwarded a payment to Allstate for a premium due on the subject policy. The automatic payment form Ms. Firmin’s account was not honored due to insufficient funds. Therefore Allstate forwarded a notice of cancellation to the insured. The notice provided: “Auto policy cancellation notice for non-payment of premium . . . If you want your insurance coverage to continue and do not want it to cancel, please make sure we receive the minimum amount due by the end of the day (midnight) on September 14, 2015 or your policy will cancel at 12:01 a.m. Standard Time on September 15, 2015.”

Despite the notice of payment due from Allstate, the extra time given for payment and the multiple ways that payment could be made to insure that the policy remained in force and effect, Ms. Firmin did not make the required payment of her insurance premium, which would have reinstated her policy, until the day after the accident.

Chenevert and Langwell opposed Allstate’s motion for summary judgment, arguing issues of material fact existed as to whether the cancellation letter met the strict requirements of Louisiana statutes. After hearing oral argument of counsel, the trial court denied Allstate’s motion for summary judgment.  The trial court stated that it Allstate did not create an effective cancellation in accordance with the statutory requirements for effective cancellation.

ON THE MERITS

An insurer seeking to avoid coverage through summary judgment bears the burden of proving that some provision or exclusion applies to preclude coverage. Summary judgment declaring a lack of coverage under an insurance policy may only be rendered if there is no reasonable interpretation of the policy when applied to the undisputed material facts shown by the evidence supporting the motion under which coverage could be afforded.

Statutory Interpretation

The issue before the court was strictly one of statutory interpretation. Does the notice sent to the insured have to meet the exact wording of the statute to be effective? Neither party disputes that the notice sent by Allstate comports with the “spirit” of the law. Plaintiffs even concede their argument is “absolutely a technical argument.”

Undeniably, the notice sent by Allstate to Ms. Firmin provides more time for payment, more continued coverage, and more convenient and modern methods for payment than statutorily required, but it does not contain the exact wording set forth in the statute.

Jurisprudence has long held that the rules of statutory construction require our courts to determine the intent and purpose of the legislature in enacting the law and to give effect, if possible, to that intent and purpose.

The Louisiana Civil Code commands the courts to apply the letter of the law unless the words or expressions are unclear, or its application leads to absurd results, in which case only then may the courts look to the context of the words, other statutes, and the spirit of the law. Pursuant to this rule, it is the duty of the court to apply the statute as written unless a literal application would lead to an absurd result, at which point the letter of the law must give way to the spirit so as to produce a reasonable result.

The statutory requirements are mandatory and are designed to notify the insured his policy is being terminated, to provide the reason for the termination and to afford him ample time to obtain other insurance protection.

Allstate argues the trial court erred in denying its summary judgment motion because the cancellation notice did in fact comply with all the statutory requirements:

  • the notice was forwarded on August 26, 2015, at least ten days prior to the date the cancellation would become effective, September 15, 2015;
  • the notice was forwarded with proof of mailing to the named insured at the address shown in the policy;
  • the notice advised the insured, Ms. Firmin, that her insurance coverage would not be canceled effective August 15, 2015, the date of the premium for which payment was returned, but instead that the cancellation of her policy would be effective at 12:01a.m. Standard Time on September 15, 2015. Therefore, Allstate’s cancellation notice, in effect gave its insured, Ms. Firmin, and the driver of her vehicle, defendant, Mr. Johnson, continued coverage for a full month past the August 15, 2015 date her policy premium was due;
  • the notice contained a transaction history outlining the return of her policy premium payment on August 20, 2015, due to the insufficiency of funds, and an explanation of the minimum amount due; and
  • the notice explained the methods available for making said payment, which methods, i.e., credit/debit card or checking account payments by phone or website, which are more generous than the statutory methods of cashier’s check, money order, or “other negotiable instrument.”

While strict construction is required in the application of the statute there is no requirement that the cancellation notice quote the exact language from the statute. The information contained in the notice sent by Allstate to Ms. Firmin was more than sufficient to advise her of the steps she needed to take to maintain her automobile insurance coverage, and fully complied with the intent and provisions of the statute.

It is undisputed that Ms. Firmin did not pay her automobile insurance premium by midnight on the last day available by the notice but instead paid her premium more than one month later, the day after the accident. This, despite a complete explanation of the methods available for payment of the minimum amount due, and the date the notice of cancellation of the policy was effective.

It is undisputed that Ms. Firmin chose not to take advantage of any of the many different opportunities presented by Allstate for payment of her insurance premium. The court found that Allstate’s cancellation notice more than fully complied with the legislative provisions and the intent of the statute. An insured cannot simply ignore a valid notice of cancellation with provisions for re-instatement more favorable than the statute actually requires, wait more than thirty days after the effective date of cancellation, and then try to send in a policy payment the day after a non-covered accident occurs. Such a statutory construction would produce an absurd result.

The claims against Allstate Property and Casualty Insurance Company were dismissed with prejudice.

ZALMA OPINION

Allstate, trying to act in good faith and deal fairly with its insured, provided additional time than required by the statute and provided more means by which she could have paid and reinstated coverage. The insured ignored the offer to reinstate and did nothing until the day after the accident attempting to get coverage only after it was needed. The trial court fell for the argument and Court of Appeal noticed the attempted fraud and granted coverage. Of course, Allstate, was stuck with the cost of defense and the appeal.


© 2017 – Barry Zalma

This article, and all of the blog posts on this site, digests and summarizes cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Insurance Claims In a Catastrophe

Insurance Claims In a Catastrophe

If your house was damaged or destroyed by a wildfire, accidental fire, windstorm, flood, hurricane or earthquake, as a result of state declared catastrophes and you had a fire, homeowners, flood insurance, tenant’s homeowners or condominium policy you will be dealing with an insurance adjuster to gain indemnity for your losses. You should recognize that dealing with an insurance adjuster in a catastrophe is usually fairly easy. The adjuster and the insurer are under pressure from local, state and federal governments to quickly resolve the multitude of claims resulting from the catastrophe.

Insurers dealing with a catastrophe will usually be in a very generous mood. They will be seeking good publicity by taking care of victims of the catastrophe quickly and fairly. To make the claims process go easily the insured person must understand that both the insured and the adjuster have duties when damage caused by fire, windstorm, flood or other insured perils are discovered.

The full article is available at https://www.fastcase.com/blog/insurance-claims-in-a-catastrophe/

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Convicted Insurance Fraud Perpetrator Sues Insurer for Reporting Him

“Chutzpah” by Fraud Perpetrator Fails

“Chutzpah” is a Yiddish term meaning unmitigated gall. The best definition I have heard is when a man is convicted of murdering his parents and pleads for mercy because he is an orphan.

In David Cook v. Federated Mutual Insurance Company, Case NO. C17-5795 RBL, United States District Court Western District Of Washington At Tacoma, (October 16, 2017) “chutzpah” gained a new definition where a person who pleaded guilty to insurance fraud sought damages from the insurer who reported his fraud to the authorities.

THE PROPOSED SUIT

David Cook applied to the USDC to Proceed with litigation against Federated in forma pauperis. Cook has attached to his application a proposed complaint against Defendant Federated Mutual Insurance Company (FMIC) seeking $15 million in damages.

LEGAL STANDARD

A district court may permit indigent litigants to proceed in forma pauperis upon completion of a proper affidavit of indigency. The Court has broad discretion in resolving the application, but the privilege of proceeding in forma pauperis in civil actions for damages should be sparingly granted.

Moreover, a court should “deny leave to proceed in forma pauperis at the outset if it appears from the face of the proposed complaint that the action is frivolous or without merit.” Tripati v. First Nat’l Bank & Trust, 821 F.2d 1368, 1369 (9th Cir. 1987) (citations omitted.

A pro se Plaintiff’s complaint is to be construed liberally, but like any other complaint it must nevertheless contain factual assertions sufficient to support a facially plausible claim for relief. A claim for relief is facially plausible when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.

ANALYSIS

Cook is a notorious fraudster who has previously been identified on the Washington State Insurance Commissioner’s “Insurance Fraud Most Wanted” list. Cook has multiple fraud-related convictions and is currently in custody awaiting trial in Pierce County Superior Court on eighteen counts of identity theft, theft, and forgery.

Cook’s alleged claims against FMIC appear to relate to an insurance fraud scheme stemming from a 2013 car accident, in which Cook submitted fraudulent claims for lost wages and Cook’s nephew falsely claimed that he was a passenger in Cook’s vehicle. The gravamen of Cook’s complaint is that FMIC was responsible for instigating criminal charges against him after learning that Cook had submitted false insurance claims related to the 2013 car accident.

Cook seeks a total of $15 million in damages from FMIC, essentially claiming that FMIC is responsible for his misfortune because they reported his fraudulent insurance claims. Cook’s complaint seeks $10 million in punitive damages from FMIC for pain and suffering resulting from the death of his wife and mother-in-law who died in a traffic accident in 2015.

Cook’s proposed complaint fails to articulate any plausible theory as to how FMIC’s reporting of his fraudulent insurance claims, conduct which Cook pled guilty to, makes FMIC liable for the tragic but unrelated passing of Cook’s family members in a traffic accident.

The Court concluded that Cook’s complaint is frivolous because it has no arguable substance in law or fact and the Court can draw no reasonable inference that FMIC is liable for the misconduct Cook alleges.

CONCLUSION

Because Cook’s proposed complaint was frivolous, his application to proceed in forma pauperis was DENIED and his complaint was dismissed with prejudice and the Application to Proceed In Forma Pauperis is denied with prejudice.

ZALMA OPINION

I have spent the last 50 years of my life dealing with people like David Cook. I have seen insurers waste money defending frivolous bad faith lawsuits because a fraudster like Cook thought a suit would compel an insurer to settle rather than fight. His attempt failed and if he wasn’t already in jail I am sure the court considered holding Cook in contempt.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Zalma’s Insurance Fraud Letter – October 15, 2017

The liens of a physician, practitioner or provider and the liens of an entity
controlled by one who has been charged with crimes involving the federal Medicare or Medicaid programs, the Medi-Cal program or the workers compensation system are required to be automatically stayed, along with any interest accruing, until disposition of the criminal proceedings, according to the bill’s latest text.
Barry Zalma, Inc. is available to provide expert advice to individuals and their counsel. Advice from Barry Zalma, Inc. is indispensable to the resolution of insurance disputes. Consultation from Mr. Zalma  can save you, your counsel or client hundreds of hours of investigative and legal work.

Zalma’s Insurance Fraud Letter, Volume 21, No. 20

The Current Issue Contains the Following

  • Any Medical Provider Convicted of Fraud in California Will Be Suspended
  • Become a Certified Expert in Corporate Property Insurance and a Certified Expert in Corporate Liability Insurance
  • The Insurance Examination Under Oath
  • Books from Barry Zalma
  • Fraud Units Being Formed by U.S. Attorney
  • Barry Zalma Speaks at Your Request
  • What Happens When the Insured Refuses to Testify at EUO?
  • E-Books from Barry Zalma
  • California Division of Workers’ Comp Suspends 8 Medical Providers for Fraud
  • The Zalma Insurance Claims Library
  • Wisdom
  • Barry Zalma
  • Good News From the Coalition Against Insurance Fraud
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions
  • Books from the American Bar Association
  • Zalma’s Insurance Fraud Letter
  • The Legend

Zalma on Insurance – A Blog

 The most recent posts to the daily blog, Zalma on Insurance, are available at  http://zalma.com/blog.
Check in every day for a case summary at http://zalma.com/blog:

 Zalma’s Insurance 101 

I have completed a video blog called that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.
Some of the 1,022 videos follow: If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.
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Trademark Infringement Claim Places Insured at Land’s End

Advertising Injury Coverage & Exclusion Clarified

Trademark infringement lawsuits are often complex and difficult for insurers to deal with. Some provide coverage without dispute while others rely on exclusions written to limit the coverages provided. Since insurance coverage grants are broad – and because no insurance policy covers every possible eventuality – exclusions are written to limit the effect of the coverage grant.

In Land’s End At Sunset Beach Community Association, Inc. v. Aspen Specialty Insurance Company, Case No: 8:17-cv-1740-T-30TGW, United States District Court Middle District Of Florida Tampa Division (October 4, 2017) the USDC was asked to compel an insurer to provide coverage it claimed was clearly and unambiguously excluded.

FACTUAL BACKGROUND

Land’s End at Sunset Beach Community Association, Inc. successfully defended itself against an Alaskan corporation for its use of “Land’s End” in advertisements. In this suit, the Community Association argues its insurer, Aspen Specialty Insurance Company, had a duty to defend it in the underlying suit. Whether that duty arose required the Court to determine what claims the Alaskan corporation brought—a task much more complicated than it sounds—and whether those claims were excluded under the Policy.

The Community Association operates a condominium complex in Treasure Island, Florida, and advertises short-term rentals of its condos. Aspen issued a commercial general liability policy to the Community Association. The Policy provides coverage for “Personal and Advertising Injury” subject to certain exclusions. The relevant exclusion provides:

“2. Exclusions

“This insurance does not apply to:… i. Infringement Of Copyright, Patent, Trademark Or Trade Secret.”

THE CLAIMS AGAINST THE COMMUNITY ASSOCIATION

Land’s End Acquisition Corporation (“LEAC”) is a corporation that operates hotels and resorts in Alaska, including the Land’s End hotel. LEAC owns the “LAND’S END” trademark, which it uses to advertise its hotels and resorts.

LEAC sent the Community Association a cease and desist letter accusing the Community Association of improperly using the “LAND’S END” trademark. After attempting to resolve the situation, the Community Association filed a declaratory judgment action against LEAC in the District Court for the Middle District of Florida seeking a declaration that the Community Association had not infringed on LEAC’s trademarks.

In response, LEAC counterclaimed. The Community Association notified Aspen and requested a defense under the Policy. Aspen denied the Community Association’s request for a defense, arguing the claims against the Community Association were not covered.

In its Counterclaim against the Community Association, LEAC alleged that the Community Association used “the LAND’S END mark in connection with short-term rental services … which creates a likelihood of confusion with LEAC’s LAND’S END marks.”

Each of the Counts incorporated the same general allegations and included claim-specific allegations referring to the use of the LAND’S END mark, constituted trademark infringement, “thereby creating a likelihood of confusion as to the source of origin, affiliation, approval or sponsorship of such services.”

GENERAL LAW GOVERNING INSURANCE COVERAGE DISPUTES

Whether an insurer has a duty to defend is determined solely from the allegations in the complaint against the insured, not by the true facts of the cause of action against the insured, the insured’s version of the facts or the insured’s defenses. If the underlying suit brings even one claim that falls within the scope of coverage, the insurer is obligated to provide a defense for the entire dispute. Any doubt about the duty to defend must be resolved in favor of the insured. But courts need not stretch the allegations beyond reason to impose a duty on the insurer. [Trailer Bridge, Inc. v. Illinois Nat. Ins. Co., 657 F.3d 1135, 1144 (11th Cir. 2011)].

An insurer has a duty to defend unless either (1) all the claims in the underlying suit do not fall within the grant of coverage, or (2) the complaint shows the applicability of a policy exclusion as to all claims within the broad scope of coverage.

POLICY COVERAGE AND APPLICABILITY OF THE IP EXCLUSION

The Court concluded the claims in the underlying suit contained allegations that the Community Association used LEAC’s advertising idea or its slogan (i.e., whether the underlying suit made claims within the scope of coverage).

The court rejected the idea that the underlying suit alleged the Community Association used LEAC’s slogan. LEAC never referred to “LAND’S END” as a slogan in the Counterclaim or Amended Counterclaim, and did not bring an explicit action for slogan infringement. LEAC also alleged in the Amended Counterclaim that the Community Association appeared to use the LAND’S END mark alone, “not descriptively.” In other words, not as a slogan.

THE EXCLUSION

Having concluded that the allegations in the underlying suit can safely be said to fall within the Advertising Idea Offense definition of personal and advertising injury—but not within the Slogan Offense—the Court then determined what effect, if any, the IP Exclusion had on the coverage.

The Court concluded that all LEAC alleges is that the Community Association infringed on its LAND’S END mark. Having made that determination, it is clear the claims are excluded.

The IP Exclusion stated that there is no coverage for “‘Personal and advertising injury’ arising out of the infringement of … trademark.” Because the IP Exclusion bars coverage for claims arising out of trademark infringement, and the underlying suits arose out of trademark infringement, the claims are clearly excluded from coverage.

Contrary to the Community Association’s argument, the second sentence of the IP Exclusion does not apply. The second sentence states, “Under this exclusion, such other intellectual property rights do not include the use of another’s advertising idea in your ‘advertisement’.”

The Community Association argued that the Advertising Idea Offense claims are within an exception to the IP Exclusion. But the exception does not apply to trademark infringement — it only applies to infringement of other intellectual property rights. This result simply makes sense. Given the broad definition of advertising idea under Florida law, all cases of trademark infringement involving advertisements would fall within the exception to the IP Exclusion at issue. If the Court were to adopt the Community Association’s position would make the exception swallow the IP Exclusion, and make it useless. That cannot be the intent of the insured and insurer when the policy was acquired.

CONCLUSION

The Community Association is correct that LEAC made claims against it in the underlying suit that fell within the broad grant of the Aspen Policy’s “personal and advertising injury” coverage. Specifically, LEAC alleged the Community Association infringed on its LAND’S END trademark, which gave rise to multiple causes of action. But because all of the causes of action were dependent on the Community Association’s infringement of the LAND’S END trademark, the IP Exclusion unambiguously barred coverage under the Policy. Because it was clear that none of the claims LEAC alleged against the Community Association were covered by the Policy, Aspen did not owe a duty to defend the Community Association in the underlying suit.

ZALMA OPINION

Much to the surprise of insureds and to the detriment of the income of the policyholders’ bar, no policy covers every possible event. As broad as the duty to defend is, it is not unlimited. When a policy clearly and unambiguously excludes a cause, as did Aspen when it excluded trademark infringement, there is no coverage for defense.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Oklahoma Statute Deprives UM/UIM Insurer of the Equitable Remedy of Subrogation

Oklahoma Statute Takes Away Insurer’s Right of Subrogation Against UM/UIM Insurer

Subrogation is an equitable remedy that allows an insurer who pays a claim to an insured due to the actions of a tortfeasor to sue the tortfeasor as if the insurer is its insured to recover its payment. It is only fair to allow the insurer subrogation as it would allow an uninsured to sue, and recover from, a tortfeasor.

In Vonda Raymond, Guardian Of Mark Raymond v. Tami Taylor, individually and as Personal Representative of the Estate of William Cole Taylor, deceased, and on behalf of the wrongful death beneficiaries v. Larry Bedell, an individual, And Blueknight Energy Partners, L.P., a foreign corporation, Defendants v. Compsource Oklahoma, Intervenor, and American Mercury Insurance Company, 2017 OK 80, Case Number: 113894, Supreme Court Of The State Of Oklahoma (October 10, 2017) The Supreme Court of Oklahoma was called upon to construe a statute that deprived an insurer of its right to subrogate.

THE ISSUE

The question presented is whether the uninsured motorist insurance carrier is entitled to subrogation against the underinsured tortfeasor’s assets, including excess insurance coverage, in the amount the uninsured motorist insurance carrier had previously paid to the injured party.

FACTUAL HISTORY

Mark Raymond sued various tortfeasors. American Mercury Insurance Company, the uninsured motorist insurance carrier, sought subrogation from the tortfeasors of the uninsured motorist payments. Raymond settled with the tortfeasors for a confidential amount inclusive of the disputed subrogation claim. The district court ordered that the UM insurance carrier was entitled to full subrogation. The Court of Civil Appeals affirmed and the case was resolved by the Supreme Court.

Larry Bedell (Bedell) was an employee of BlueKnight Energy Partners (BlueKnight); BlueKnight carried a $1,000,000 primary automobile liability policy and a $40,000,000 excess liability policy. Bedell was driving an oil tanker truck, owned by BlueKnight, and attempted to turn in front of the Guy’s Seed vehicle causing a collision. The collision caused an immediate explosion, which resulted in Taylor’s death and Raymond suffering significant permanent injuries.

Raymond qualified as insured under Mercury’s UM coverage and the UM claim was reported to Mercury. Raymond sued Bedell and BlueKnight. Mercury investigated and offered the UM policy limits to Raymond’s and Taylor’s representatives, paying $500,000 to each.

Raymond disputed Mercury’s right to subrogation in this action, but Defendants refused to settle unless the settlement amount was inclusive of Mercury’s disputed subrogation claim. An agreement was reached where Raymond settled with Defendants for a confidential amount greater than the primary insurance liability limits but less than the excess policy; Defendants paid Raymond the amount of the settlement minus the $500,000 claimed by Mercury. The disputed $500,000 was to be held until there was an agreement or court order as to who was entitled to the funds.

ANALYSIS

Oklahoma statutes provide regulations for uninsured motorist insurance coverage and makes it mandatory as an option for all automotive insurance policies. For purposes of UM coverage protection, the term “uninsured motor vehicle” also includes insured vehicles where the liability limits are less than the amount of the claim of the person making a claim, otherwise known as under-insured vehicles. Any excess or umbrella policy is not included when determining the liability limits of a vehicle under the statutes.

The statute, however, states: “Provided, however, with respect to payments made by reason of the coverage described in subsection C of this section, the insurer making such payment shall not be entitled to any right of recovery against such tortfeasor in excess of the proceeds recovered from the assets of the insolvent insurer of said tortfeasor. Provided further, that any payment made by the insured tortfeasor shall not reduce or be a credit against the total liability limits as provided in the insured’s own uninsured motorist coverage. Provided further, that if a tentative agreement to settle for liability limits has been reached with an insured tortfeasor, written notice shall be given by certified mail to the uninsured motorist coverage insurer by its insured.” [emphasis by the court]

When a statute is unambiguous, its language will be applied without further inquiry as to its meaning. The Supreme Court has stated in the past that the intent of UM legislation is to provide the same protection for an insured person who is injured by an uninsured motorist as he or she would have if the uninsured motorist carried liability insurance.

The exception in the statute limits the UM carrier’s right to subrogation to recovery from the tortfeasor’s primary automotive liability insurer only and prohibits recovery against the tortfeasor in excess of the proceeds recovered from primary insurer or their assets. This exception only applies to UM payments made because of UM coverage described in subsection (C). Subsection (C) describes tortfeasor vehicles with insolvent liability insurers and under-insured vehicles as “uninsured” for purposes of UM coverage.

There is no language in the statute to indicate that the legislature contemplated UM carriers recovering from excess insurance policies of the tortfeasor. Instead, the legislature gave explicit instructions that UM carriers are not entitled to any right of recovery against the tortfeasor in excess of recovery from the insurer of the tortfeasor.

Contrary to Mercury’s claims, the Supreme Court concluded that Raymond is not receiving a windfall. Mercury was paid a premium for UM protection and Raymond recovered an amount not covering all of his damages within the limits of the primary liability policy and the UM policy. Raymond has also recovered an amount from the tortfeasor’s other assets that, combined with the liability and UM funds, covered his damages. It would be unjust to permit Mercury to avoid its liability with its claim that the tortfeasor’s other assets, that happened to be an excess liability policy, removed Mercury’s liability thus denying Raymond from receiving that for which Mercury was paid a premium.

In the present case, the tortfeasors carried $1,000,000 in primary automotive liability insurance. Because Raymond’s claim was clearly in excess of the liability limit, Mercury paid UM benefits under the definition of uninsured motor vehicle in the statute. The Supreme Court concluded that under the statute Mercury was limited to subrogation from the primary insurer and is not entitled to subrogation from any assets of the tortfeasor, including the excess liability policy.

CONCLUSION

As there is no right to subrogation by an UM carrier against an under-insured tortfeasor’s assets, Mercury did not have the right to subrogate the UM payment and we do not need to address the issue of attorney fees. The Court of Civil Appeals opinion is vacated and the judgment of the district court is reversed. The case is remanded with instructions to the District Court to release the $500,000 to the Appellant.

ZALMA OPINION

The Supreme Court’s decision correctly interpreted the statute. The problem is that Legislature, improperly deprived an UM/UIM insurer of the right of subrogation that is a right provided by contract and equity. The statute needs to be revised so that a UM/UIM insurer can subrogate against a tortfeasor since that is the purpose of the equitable remedy.

 

 

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I’m Dead – Really I Am!

Life Insurance Fraud Fails

Nigeria seems to be the birthplace of different types of fraud. Everyone in the U.S. has received a letter, e-mail or fax offering millions from some Nigerian prince or government official if only the recipient gives the person his bank account codes and numbers. In addition, many false life insurance claims based on accidental death in Nigeria are arriving with great volume.

In Abdul Salam Badmus v. Mutual Of Omaha Insurance Company, No. 17-20181, United States Court Of Appeals For The Fifth Circuit, (October 2, 2017) the Fifth Circuit was faced with such a case which – contrary to the court’s order to not formally publish the opinion – requires wide publicity.

FACTS

In August 2010, Mutual of Omaha Insurance Company (MOOIC) issued an Accidental Death Policy to Selem Babtunde Badmus (Selem), providing that it would pay a benefit of $750,000 in the event of Selem’s death if it was “caused by injury sustained while riding as a passenger in any public land, air or water conveyance provided by a ‘Common Carrier.'”

The policy named Selem’s brother, Abdul Salam Badmus (Badmus) as beneficiary. In March 2014, Badmus filed a claim with MOOIC seeking $750,000 under the policy, alleging that Selem died in an automobile accident in Lagos, Nigeria, on January 24, 2014. Badmus did not provide the requested documents.

Upon detecting numerous discrepancies and omissions in the forms Badmus submitted, MOOIC hired Worldwide Resources, Inc. (Worldwide) to investigate the claim. Worldwide ultimately concluded that most of the information Badmus submitted was suspect, and MOOIC denied the claim.

Badmus sued MOOIC in the United States District Court for the Southern District of Texas, acting as his own attorney, seeking payment under the policy and alleging (1) breach of contract; (2) unfair settlement practices and statutory bad faith; (3) misrepresentation of insurance policy; (4) violations of the Prompt Payment Statute and other provisions of the Texas Insurance Code; and (5) common law bad faith.

After the suit was served MOOIC uncovered a series of name-change forms indicating that “Selem Babatunde Badmus,” residing at Badmus’s address in Houston, Texas, applied for a name change to “Abdul Salam Badmus” on May 21, 2016, over two years after Selem’s alleged death in Nigeria. Shortly thereafter, Badmus was indicted for felony insurance fraud based on the insurance claim he filed with MOOIC.

Based on this information, the district court concluded that the insured was alive and granted summary judgment for MOOIC. Badmus appeals, challenging the district court’s grant of summary judgment for MOOIC as well as some of its evidentiary rulings.

ANALYSIS

The Fifth Circuit is required to review the district court’s evidentiary rulings under an abuse of discretion standard. Badmus argued that the district court erred in granting MOOIC’s motion to strike several exhibits he submitted with his summary judgment motion. These exhibits contain affidavits from two Nigerian witnesses that claimed to have witnessed the automobile accident and alleged that Selem died. The exhibits also contain a number of Internet and newspaper articles and websites as well as one scholarly article. The district court concluded that the exhibits must be excluded because they were inadmissible hearsay, irrelevant, and not in compliance with the Federal Rules of Civil Procedure.

Since the only argument Badmus raises on appeal is that the newspapers and periodicals contained in these exhibits are self-authenticating and relevant, there was no abuse of discretion in the district court’s exclusion of the evidence.

Badmus next argued that the district court erred in denying his motion to strike exhibits submitted by MOOIC. The exhibits in question include the indictment against Badmus for insurance fraud, Texas driver’s license records, name-change forms, and other evidence suggesting that one of Badmus’s witnesses knew the insured in 2005. The district court concluded that the forms were relevant to the question of whether the insured was alive.

The evidence at issue in Badmus’s motion to strike is highly relevant because it addresses a fact of enormous consequence in the litigation: whether the insured is alive or dead. Evidence is relevant if it has any tendency to make a fact more or less probable than it would be without the evidence and the fact made more or less probable is of consequences in determining the action.

To prevail under his claim for breach of contract under Texas law, Badmus must establish four elements: (1) the existence of a valid contract; (2) proof of the plaintiff’s performance; (3) evidence of the defendant’s breach; and (4) damages resulting from the breach. Badmus has failed to provide sufficient evidence to establish a genuine issue of material fact.

Badmus  failed to establish genuine issues of material fact with regard to any of his other claims. His claims of bad faith and violations of the Prompt-Payment Statute and other provisions of the Texas Insurance Code all depend on his ability to demonstrate a valid breach of contract claim. As discussed above, Badmus failed to prove that the insured has died under the circumstances required by the policy and that he is entitled to payment by MOOIC.

Finally, with regard to his claim of misrepresentation, Badmus fails to assert anything more than conclusory allegations that MOOIC inserted fake policy documents into its claims file in violation of Chapter 541 of the Texas Insurance Code. He does not present any evidence to support these allegations. Summary judgment was appropriate.

ZALMA OPINION

Those arrested for insurance fraud, like Badmus, have no shame. While under arrest for insurance fraud relating to the alleged death of the person he alleged to be his brother, Badmus had the unmitigated gall to sue MOOIC for the bad faith refusal to pay his claim. This case, and its ilk, is perfect evidence of the ongoing abuse of the tort of bad faith sufficient to cause the courts to reconsider the value of the tort.

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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Incorrect Statement of Values Allows Rescission

Innocent Material Misrepresentation Sufficient to Allow Rescission

Insurance, as I have said over and over again, is a business of the utmost good faith that requires both parties to do nothing that will deprive the other of the benefits of the contract of insurance. An insurer has the unquestioned right to rely upon the person who seeks insurance for the information it needs to make a wise decision about whether to insure or not insure.

In AMI Stamping, LLC, v.  Ace American Insurance Company, No. 16-2341, United States Court Of Appeals For The Sixth Circuit, (October 5, 2017) was faced with a district court ruling that defendant ACE American Insurance Company was entitled to rescind plaintiff AMI Stamping, LLC’s insurance policy because AMI made a material misrepresentation regarding property value at the time it applied for coverage. The district court granted summary judgment in favor of ACE.

FACTS

AMI is a Michigan limited liability company. Insurance was acquired through insurance agency Todd Associates, Inc. Spankie Carolanne, who is licensed to sell property and casualty insurance “with the State of Ohio,” manages the account at Todd Associates. In that capacity, she “obtain[s] insurance based on the risk characteristics . . . and the exposures that [her clients] have[.]” She also handles client calls and correspondence, produces insurance proposals and applications, “counsel[s] the insured when they have questions about insurance[,]” and “market[s] [insurance accounts] to various companies” when the policies come up for renewal.

In 2009, a commercial properties policy was acquired from ACE issued by ACE’s managing general agent Starr Technical Risks Agency, Inc. The policy provided replacement cost coverage. The policy contained a Commercial Property Conditions provision that voided coverage if the insured “intentionally conceal[ed] or misrepresent[ed] a material fact concerning” the covered property. The policy was originally valid for a one-year term, but was renewed through January 18, 2012.

In early 2010, AMI acquired a security interest in a Detroit, Michigan building and in the equipment and machinery stored there. The insured asked ACE to add AMI and its new assets to the existing policy. Carolanne asked AMI’s representative to provide, among other information, an “[a]ppraisal of the buildings and personal business property” in order “[t]o determine the proper insurance values to report to [ACE].”

In response,  a document he described as an “[a]ppraisal of the equipment” that identified each piece, listed its value, and reported a total valuation of $138,100 was delivered to Carolanne. AMI did not share any of the earlier appraisals done for AMI that placed significantly higher values on the equipment in question.

Carolanne then reached out to Vito Maniaci, an underwriter for Starr, and asked him to add the property to the existing policy. She told Maniaci the building was valued at $1,920,000 and “the value of the personal property (per appraisal) is $138,100, which consists entirely of machinery and equipment.”

ACE endorsed the policy effective February 11, 2010 insuring against the risk of loss of the property to the schedule of insured locations for a pro-rata premium of $1,357. ACE renewed coverage for a premium of $1,499. At his deposition, Maniaci confirmed that he “relied on information from Carolanne,” including information regarding asset values, in preparing the Revstone policy. He clarified that the premium “depend[ed] on the value[]” of the property being insured. At her deposition, Carolanne similarly stated that the premium “is based on a rate times the value of the property.”

In early 2012, AMI discovered the equipment had been stolen.  A claims adjuster later contacted Smith on behalf of ACE to “finalize the claim” and confirm that “the exact amount you are claiming” was indeed $138,100. AMI responded that it was not and, because the policy provided for payment of the equipment’s replacement cost, he would be submitting a replacement cost valuation.

AMI commissioned an appraisal of the equipment’s replacement cost value, which the appraiser concluded was $1,907,000. AMI then submitted a proof of loss for that amount.

AMI filed suit.  ACE successfully moved for summary judgment and AMI appaled.

ANALYSIS

Summary judgment is proper only when the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.

The federal court, applying Michigan law, understood that Michigan courts have long recognized that a false representation in an application for insurance which materially affects the acceptance of risk entitles the insurer to cancellation as a matter of law. Michigan also concludes that a misrepresentation on an insurance application is material if, given the correct information, the insurer would have rejected the risk or charged an increased premium.

Rescission is justified “without regard to the intentional nature of the material misrepresentation,” as long as it is relied upon by the insurer. [Lakes State Ins. Co. v. Wilson, 586 N.W.2d 113, 115 (Mich. Ct. App. 1998) (emphasis added). The rationale for Michigan’s rule is obvious: the insurer, in making underwriting decisions and in setting premiums, has the right to rely on the information the insured provides as true and accurate.

Although AMI asserts it made no misrepresentation because Carolanne asked for an “appraisal” of the equipment’s value and that is exactly what AMI provided, this argument ignores the importance of accurate valuations to an insurer’s risk assessment and premium calculations. The appraisal provided did not specify what type of valuation the $138,100 figure represents, but as the district court aptly stated, it was a grossly inaccurate description of the equipment’s value “by any measure.”

AMI admitted “that it provided additional information to ACE regarding the value of the property.” AMI’s admission makes sense. When it applied for coverage in 2010, AMI had two other appraisals from 2006 in its records showing much higher orderly liquidation ($462,800), forced liquidation ($385,450), and fair market ($415,300) values for the equipment.

AMI submitted a proof of loss based on that latest appraisal’s replacement-cost-value determination of $1.9 million—an amount nearly fourteen times the valuation AMI submitted only three years earlier and upon which its premium was based.

The accuracy of the insured’s representations of value is crucial because the premium for the type of coverage AMI bought is based on the value of the property to be insured. Thus, as to materiality, had ACE known from the outset that AMI valued the equipment at approximately $1.9 million, or at any of the values from either 2006 appraisal, it would have charged AMI more than $1,499 a year to insure the property.

AMI conceded that if it “had made an unintentional [mis]representation,” contract provisions regarding misrepresentations do not operate as a waiver of common law rights regarding rescission. The appellate court agreed with the district court and concluded that AMI had not established a genuine dispute of material fact that it made a material misrepresentation in applying for insurance coverage upon which defendant relied.

Accordingly, ACE was entitled to rescind the policy as a matter of law regardless of whether AMI’s misrepresentation was innocent or intentional.

ZALMA OPINION

AMI saved a great deal of money by reducing falsely representing the values of the property at risk at the time it acquired the policy, saved almost $200,000 in premium each year. Of course, when the property was stolen, that saving was wiped out because the insurer was deceived and properly rescinded. Finding that the attempt to save some premium or innocently misrepresenting the true values, there was no coverage for its $1.9 million loss. The insured’s were their own worst enemy – they lied, were caught, admitted the lie, and deserved to lose the $1.9 million.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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The Duty to Select Type and Amount of Insurance Belongs to the Insured

Insurance Agent Only Required to Provide Insurance Ordered

Unless they take on a fiduciary obligation an insurance agent or broker is only required to provide the insurance it was asked to acquire. The agent or broker need not – unless paid for such a special service – advise the insured about the type or amount of coverage the insured needed. This is usually not a problem until the insured has a loss that was not covered by the policy it ordered so it sues the broker for not compelling the insured to buy the insurance it needed in the event of a loss.

In Advanced Radiographics, Inc. v. Colony Insurance Company, Et Al., 17-144, State Of Louisiana Court Of Appeal, Third Circuit (October 4, 2017) Advanced Radiographics attempted to force an insurance agent to pay for a loss not covered by the policy it acquired for the insured.

FACTS

The court of appeal was faced with a dispute over coverage after Plaintiff’s property was damaged by fire. Following the loss, Plaintiff submitted a claim to its insurer, who denied the claim. Plaintiff sued the insurance brokerage, and the broker, through whom it had purchased the insurance, for breach of fiduciary duty as agent.

Plaintiff, Advanced Radiographics, Inc. (“ARI”), who is in the business of storing medical records for health care providers in Lafayette, Louisiana, has ten locations eight of which are used to store medicals records. ARI purchased a commercial package policy that included both a general liability (“GL”) coverage part and a property insurance coverage part, from Colony Insurance Company (“Colony”). The GL coverage extended to all ten of ARI’s locations, including the warehouse, whereas the property coverage (which was limited to coverage for contents and business interruption/extra expense), extended only to ARI’s corporate office.

In November of 2014, a vehicle crashed into ARI’s warehouse, resulting in a fire. Following the loss, ARI submitted a claim to Colony, which Colony denied. As a result of Colony’s refusal to pay the claim, ARI filed suit against Colony. ARI also sued Brown and Brown of Baton Rouge, LLC, (“Brown & Brown”), and (now former) Brown & Brown insurance broker, Kellie Stein (“Stein”), the insurance brokerage (and broker) through whom ARI purchased the Colony Policy.

 

DISCUSSION OF THE MERITS

Exceptions of no cause of action present legal questions and are decided as if the appellate court is the trial court.

A cause of action, when used in the context of the peremptory exception, is defined as the operative facts that give rise to the plaintiff’s right to judicially assert the action against the defendant. The function of the peremptory exception of no cause of action is to test the legal sufficiency of the petition, which is done by determining whether the law affords a remedy on the facts alleged in the pleading. No evidence may be introduced to support or controvert an exception of no cause of action. Consequently, the court reviews the petition and accepts well-pleaded allegations of fact as true. The issue at the trial of the exception is whether, on the face of the petition, the plaintiff is legally entitled to the relief sought.

Louisiana has chosen a system of fact pleading. Therefore, it is not necessary for a plaintiff to plead the theory of his case in the petition. However, the mere conclusions of the plaintiff unsupported by facts does not set forth a cause of action.

Where there is an agreement to procure insurance, the Louisiana Supreme Court, in Isidore Newman Sch. v. J. Everett Eaves, Inc., 09-2161, pp. 6-7 (La. 7/6/10), 42 So.3d 352, 356-57) stated: “An insurance agent who undertakes to procure insurance for another owes an obligation to his client to use reasonable diligence in attempting to place the insurance requested and to notify the client promptly if he has failed to obtain the requested insurance. The client may recover from the agent the loss he sustains as a result of the agent’s failure to procure the desired coverage if the actions of the agent warranted an assumption by the client that he was properly insured in the amount of the desired coverage.”

An insurance agent has a duty of “reasonable diligence” to advise the client, but this duty has not been expanded to include the obligation to advise whether the client has procured the correct amount or type of insurance coverage. It is the insured’s responsibility to request the type of insurance coverage, and the amount of coverage needed. It is not the agent’s obligation to spontaneously or affirmatively identify the scope or the amount of insurance coverage the client needs.

Even if all of the allegations in the suit are taken as true, at no point does ARI allege that it requested certain insurance which Stein and/or Brown & Brown failed to procure. The supreme court of Louisiana has been clear in its direction that relying on an insurance broker/agent for advice and being disappointed by that advice is not a breach of the duty of “reasonable diligence” owed by an insurance agent/broker to a client.

The allegations in ARI’s petition attempt to impose a duty upon Stein and Brown & Brown to identify the type and amount of insurance coverage ARI needed for their property failed because Louisiana does not impose this duty upon the insurance agent or broker but, instead, upon the insured.

ZALMA OPINION

The insured in this case refused to accept responsibility for its error. It failed to order the coverage needed to protect the insurer for losses caused by the fire. The agent and the agency did what was required of it – it acquired the policy that was ordered and nothing more – and that coverage did not provide the coverage needed. This is a lesson to all businesses: hire an insurance consultant, risk manager or the like who can advise you what insurance is needed. Only rely on the agent or broker if they take on the responsibility to advise the coverages needed in writing.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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No Occurrence – No Fortuity – No Coverage for Defense or Indemnity

Lack of the Potential for a Covered Claim Defeats Bad Faith Suit

The ability to allege and prove a right to a defense under a liability insurance policy is usually fairly simple. All that is required of the insured is to prove that there is a potential for coverage for the allegations of the suit against the insured. Much to the surprise of most insureds, not every lawsuit raises a potential of coverage regardless of the wisdom and creativity of the insured’s lawyer.

In WAWGD, Inc. dba Foresight Sports v. Sentinel Insurance Company, Case No.: 16-cv-2917-CAB-BGS, United States District Court Southern District Of California, (September 29, 2017) Plaintiff WAWGD, Inc. d/b/a Foresight Sports (“Foresight”) asked the court to compel liability insurance coverage in connection with a third party complaint seeking defense and indemnification by the defendants in a patent infringement lawsuit filed against them.

BACKGROUND

In 2015, Max Out Golf, LLC (“Max Out”) filed a lawsuit in federal court in Texas against Roger Dunn, Inc., and GWNE, Inc. (together, “Dunn/GWNE”) alleging that Dunn/GWNE had infringed two of Max Out’s patents.

Max Out alleged that Dunn/GWNE’s “infringing activity has directly and proximately caused damage to Plaintiff Max Out Golf, including loss of profits from sales and/or licensing revenues it would have made but for the infringements.”

Dunn/GWNE filed a third-party complaint (“TPC”) against Foresight.The TPC alleged that Dunn/GWNE were bringing it “based on Foresight’s warranty of non-infringement and duty to indemnify [Dunn/GWNE] for Max Out Golf’s infringement claims under the applicable Commercial Code provisions.”

THE POLICY

Foresight sued its insurer seeking insurance coverage and bad faith damages contending that Sentinel has a duty to defend and indemnify Foresight in connection with Dunn/GWNE’s TPC pursuant to a Business Owners Policy (the “Policy”) Sentinel issued to Foresight.

The Policy also contains a breach of contract exclusion.

CALIFORNIA LAW ON THE INTERPRETATION OF INSURANCE POLICIES

Neither party disputes that California law governs this insurance coverage dispute. Under California law, the interpretation of an insurance policy is a question of law to be answered by the court. Interpretation of insurance contracts raise questions of law and thus are particularly amenable to summary judgment. The court must look first to the language of the contract in order to ascertain its plain meaning or the meaning a layperson would ordinarily attach to it.

However, if the terms are ambiguous [i.e., susceptible of more than one reasonable interpretation], courts interpret them to protect the objectively reasonable expectations of the insured. If the policy is ambiguous because it is reasonably susceptible to more than one interpretation, the ambiguity is construed in favor of coverage.

Because the duty to defend arises whenever a claim may potentially lead to indemnity and if there is no duty to defend, then there is also no duty to indemnify. The insured need only show that the underlying claim may fall within policy coverage; the insurer must prove it cannot.

DISCUSSION

To establish the existence of a duty to defend under the Policy Foresight has the burden of establishing the TPC alleges facts that potentially could lead to a covered claim.

Property Damage

The TPC does not allege that Dunn/GWNE suffered any property damage. The TPC simply asserts contractual indemnity claims, and the only damage it alleges is whatever Dunn/GWNE is ordered to pay Max Out on its patent infringement claims, along with its other costs and fees associated with Max Out’s lawsuit.

There is no allegation in the TPC that Foresight’s alleged express or implied agreement to indemnify Dunn/GWNE for patent infringement claims actually caused any damage to, or loss of use of, the Foresight products Dunn/GWNE had purchased. Rather, Dunn/GWNE seeks damages from Foresight for economic harm due to Max Out’s patent infringement claims and Foresight’s failure to indemnify Dunn/GWNE therefor. These economic injuries do no constitute property damage triggering coverage under the Policy.

The TPC, contrary to Foresight’s argument, does not allege loss of use of the Foresight products or seek any damages for any loss of use of the Foresight products (or any other property for that matter); it only seeks defense and indemnification from Foresight.

Foresight is not entitled to justify an argument for coverage based on speculation about claims that have not been alleged or asserted. For a duty to defend to exist, the actual allegations in the TPC itself must actually create the potential for coverage. Otherwise, every complaint ever filed would create a duty to defend because it is always possible that the complaint could be amended to create the potential for coverage.

Occurrence

Moreover, even if the injury for which Dunn/GWNE sought recovery from Foresight in the TPC constituted “property damage,” such property damage was not caused by an “occurrence.” An accident or occurrence is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.  Here, any injury was caused by Foresight’s manufacture and sale of products to Dunn/GWNE and alleged breach of its warranty to Dunn/GWNE that the products Foresight sold do not infringe any patents and alleged agreement to indemnify Dunn/GWNE for infringement claims.

Foresight’s manufacture and sale of the products were deliberate and intentional acts, and there was no additional, unexpected, independent, and unforeseen happenings that caused the infringement alleged by Max Out or the indemnity obligation. The court concluded that the conduct giving rise to the underlying action against Foresight was not an “accident” nor an “occurence” within the coverage provision. Because there is no potential basis for coverage, there is no duty to defend.

Intellectual Property Exclusion

Having found that there is no potential for coverage based on the insuring agreement, the Court need not consider any policy exclusions.

The policy language is clear and explicit and is, therefore, dispositive. More specifically, this exclusion clearly and unambiguously communicates that:

(1)  personal and advertising injury arising out of any actual or alleged infringement or violation of any intellectual property right is excluded from the policy;

(2) a [patent] is considered intellectual property; and

(3) any injury or damage alleged in a suit that also alleges an infringement or violation of an intellectual property right is also excluded.

The exclusion is valid and enforceable. Accordingly, the intellectual property exclusion is another reason why Sentinel did not have a duty to defend Foresight.

While an insurer’s duty to defend is broad in scope proper coverage analysis begins by considering whether the policy’s insuring agreements create coverage for the disputed claim. If coverage exists, then the court considers whether any exclusions apply. If coverage does not exist, the inquiry ends. The exclusions are no longer part of the analysis because they cannot expand the basic coverage granted in the insuring agreement. The rule is no different for exceptions to exclusions.

Because the TPC did not allege any facts that created the potential for a covered claim, Sentinel had no duty to defend Foresight from Dunn/GWNE’s claims or to indemnify Foresight for its settlement of those claims.

In addition, because Sentinel did not breach any coverage obligation, it did not breach the implied covenant of good faith and fair dealing.

ZALMA OPINION

No insurance policy covers every possible loss. Insurance, by definition, only exists if the loss claimed is contingent or unknown. An intentional act, like the manufacture and sale of a product that infringes on another’s patent, coupled with a promise to indemnify any suit for infringement, is an intentional act that can never be insured against. This wasn’t even a good try. It was a waste of time and money.

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Restoration of Ill Gotten Gains Not Insurable – Fraud Doesn’t Pay

Neither an Intentional Nor a Criminal Act is Fortuitous

From the first insurance coverage issued on a clay tablet in ancient Sumeria every insurance claim required a fortuitous loss – one that is either contingent or unknown at the time of the loss. People who are insured prefer to be paid regardless of their conduct and when an insurer refuses to pay will invariably sue.

In Philadelphia Indemnity Insurance Company, a foreign corporation v. Sabal Insurance Group, Inc., a foreign corporation and Ian Marshall Norris, Case No. 16-62168-Civ-COOKE/TORRES, United States District Court Southern District Of Florida (September 28, 2017) the USDC for the Southern District of Florida was asked to compel an insurer to provide indemnity to an insured who settled a claim with the State of Florida for money taken by the insured by fraud. The parties disputed whether a Stipulated Settlement Agreement between Defendants and the State of Florida stemming from an alleged grand theft is covered under the insurance policy Defendants have with Plaintiff.

BACKGROUND

Plaintiff issued to Defendants a Private Company Protection Plus Liability Policy (“Policy”), which included Directors and Officers (“D&O”) liability insurance that was effective at the time of this action.

The Policy covered certain losses from claims made against Defendants for wrongful acts. A “D&O Wrongful Act” included an “act, error, omission, misstatement, misleading statement, neglect, or breach of duty committed or attempted by” either Defendant. “[A] criminal proceeding commenced by the return of an indictment” counted as a “Claim,” and a “Loss” included “Damages” and “Defense Costs.” “Damages” were defined as “any monetary judgment . . . or monetary settlement, including the punitive, exemplary or multiple portion of any judgment (to the extent such damage is insurable under law . . .),” while “Defense Costs” encompassed most “reasonable and necessary legal fees and expenses incurred in the defense of a Claim . . . .”

The policy barred payments “arising out of, based upon or attributable to” Defendants for either “gaining any profit, remuneration or advantage to which [Defendants] were not legally entitled,” or “any dishonest or fraudulent act or omission or any criminal act or omission by [Defendants].” These exclusions only applied, however, “if a final and non-appealable judgment or adjudication establishes the Insured committed such act or omission.”  The Policy also did not consider “criminal or civil fines or penalties imposed by law” a covered “Loss,” nor did “Loss” include matters deemed uninsurable under the law.

The State of Florida (“State”) charged Defendants with five counts of grand theft related to alleged overcharging of the Miami-Dade Aviation Department (“MDAD”) for worker’s compensation and general liability insurance that MDAD pays on behalf of Quality Aircraft Services (“QAS”), its baggage handler. Defendants allegedly fraudulently obtained over $416,000.00, though the amount of fraud purportedly within the statute of limitations was $180,807.87.

By February 2016, Defendants entered into a Stipulated Settlement Agreement with the State, where the State agreed to nolle prose [where the prosecutor in a criminal prosecution undertakes not to continue the action or prosecution] all charges and Defendants agreed to pay a “settlement sum” of $303,807.97.

This sum consisted of a “Payment” to the MDAD for $183,807.87; a “Donation” to a victims’ assistance fund for $100,000.00; and “Costs of Investigation” payable to the MDAD for $20,000.00.  Further, Defendants agreed to pay for an independent monitor, to institute an internal training program, and to refrain from engaging with MDAD for a period of time. The state court ratified the agreement in February 23, 2016.

Plaintiff issued a reservation of rights at three different times before the Stipulated Settlement Agreement. Plaintiff’s last reservation of rights letter in January 2015 stated that the “alleged miscalculations as to your client’s revenues insurance costs are within the definition of D&O Wrongful Acts,” and that it would “advance fees and reasonable/necessary expenses incurred in the defense of this matter.” The letter also cautioned “the fact that certain provisions have been excerpted here does not mean that all portions of the policy are not important,” and that the “reservation of rights is intended for your information and guidance and is based on the materials presented to date. [Plaintiff] fully reserves all its rights under the policy . . . .”  At one point, Plaintiff advised defendant’s defense counsel that the Policy would not cover payments of any “restitutionary amount” Defendants made to the State.

DISCUSSION

Florida law mandates that courts interpret insurance contracts under their plain meaning, without need for extrinsic evidence. Florida courts start with the plain language of the policy, as bargained for by the parties. . . . Policy terms are given their plain and ordinary meaning and read in light of the skill and experience of ordinary people. A court must construe every insurance contract according to the entirety of its terms and conditions.

The Policy Language

Both exclusionary provisions state that they “only apply if a final and non-appealable judgment or adjudication establishes the [Defendants] committed such act or omission.” While the language is clear that the exclusions do not apply without a judgment or adjudication, it is equally clear that the exclusions do not apply if there is not first a covered “Loss.” The language of the Policy is clear and consistent with Florida law: the exclusions do not come into play unless the Stipulated Settlement Agreement constitutes a “Loss.”

The Stipulated Settlement Agreement is not a covered “Loss”

As a matter of law, “Loss” does not include the “restoration of ill-gotten gains.” It is axiomatic in the insurance industry that one should not be able to insure against one’s own intentional misconduct. The return of money received through a violation of law, even if the actions of the recipient were innocent, constitutes a restitutionary payment, not a “loss.” It is immaterial whether the defendant committed fraud.

The payments in the Stipulated Settlement Agreement are clearly restitutionary in nature. The case was initiated via a subpoena, followed by an information charging five counts of grand theft against both Defendants. Payments made to resolve this claim can only be said to disgorge Defendants of property to which they were allegedly not legally entitled.

The court concluded that the payments made in the settlement are restitutionary in nature.

The court concluded that there is no ambiguity in the Policy and the payments Defendants agreed to pay as part of the Stipulated Settlement Agreement are restitutionary in nature regardless of whether there is an admission of guilt or a final adjudication.

CONCLUSION

Plaintiff established that its Policy did not apply to the Stipulated Settlement Agreement. No genuine issue of material fact exists regarding the Policy. Plaintiff is not obliged to indemnify Defendants for the Stipulated Settlement Agreement. Accordingly, summary judgment in favor of Plaintiff is appropriate.

ZALMA OPINION

It is contumacious conduct to bring a suit seeking payment from an insurer of money obtained by theft and paid back to the state of Florida to stop a criminal prosecution. The loss here was not fortuitous, it was an lost as a result of an intentional criminal act. The suit should have been dismiss as frivolous regardless of the cases the defendants cited indicating a potential for coverage.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Who Pays Black Lung Victim When His Employer and Its Insurer are Insolvent?

Guaranty Fund Is More Responsible than the Federal Black Lung Trust Fund

Island Fork Construction v. Jimmy Bowling; Director, Office Of Workers’
Compensation Programs, No. 16-4319, United States Court Of Appeals For The Sixth Circuit (September 29, 2017)

Jimmy Bowling worked as a coal miner for almost 30 years. There is no dispute that he is eligible for benefits under the Black Lung Benefits Act. The question is who should pay the benefits to this disabled miner given that the responsible mine operator and the company that insured that operator are both insolvent. Two options exist — the federal Trust Fund and the Kentucky Insurance Guaranty Association (KIGA). The administrative law judge (ALJ) and Benefits Review Board (Board) both concluded that KIGA should provide benefits.

BACKGROUND

Bowling worked as a coal miner for over 29 years. He spent most of that time as a foreman and substantially all of his work was underground. Bowling’s last job was working for Island Fork Construction in a Kentucky mine where he moved belt lines, took out steel track, and produced coal. The parties do not dispute the facts underlying Bowling’s claims or his eligibility for benefits.

In 2002, Bowling filed a claim for benefits under the Black Lung Benefits Act. An Administrative Law Judge (ALJ) denied the claim in 2005, finding that Bowling was totally disabled, but that he had failed to establish that he had pneumoconiosis (black lung), or that pneumoconiosis caused his total disability. In 2010, Bowling filed the current claim for benefits. During the time intervening between these claims, a provision of the Affordable Care Act amended the Black Lung Benefits Act to reinstate a rebuttable presumption that claimants with respiratory disabilities and 15 years or more of underground coal-mining work experienced those disabilities as a result of pneumoconiosis. Bowling sought benefits pursuant to this presumption.

In April 2011, the District Director issued a Proposed Decision and Order that awarded Bowling benefits. Island Fork requested de novo review by an ALJ.

At the hearing before the ALJ in December 2014, counsel informed the ALJ that both Island Fork and its insurer, Frontier Insurance, were insolvent. Frontier declared insolvency in November 2012, after the Proposed Decision and Order had been issued. Once the claim reaches the ALJ stage, there is no mechanism to designate a different responsible operator.

The Trust Fund was created by the Black Lung Benefits Act and provides benefits when there are no responsible operators available, including when an operator is deemed at the ALJ stage not to be financially capable of paying benefits. KIGA is a nonprofit body created by the Kentucky Insurance Guaranty Association Act (Guaranty Act) to provide benefits when a member insurance company is insolvent. KIGA argued that the exceptions to the Guaranty Act apply and the benefits should instead be provided by the Trust Fund.

After briefing, the ALJ decided that Island Fork was still the responsible operator because benefits could be paid by KIGA. Island Fork “as insured by” KIGA, and represented by common counsel, petitioned for review of the ALJ Decision and Order by the Board.

DISCUSSION

KIGA did not have a direct interest in the claim until Frontier became insolvent, which was after the District Director issued a Proposed Decision and Order and the claim file had been sent to the ALJ. At that time, KIGA filed a letter that stated: “all of [Frontier’s] claims have been turned over to KIGA.”

KIGA also indicated that it “had received a notification letter advising of potential liability as a result of the insolvent carrier. In response, KIGA made an entry of appearance and defended the case while it investigated whether Claimant was eligible for assistance under the Kentucky guarantees law.” At the hearing before the ALJ, counsel stated that she was making an appearance “on behalf of Island Fork Construction which was previously insured by Frontier Insurance Company which is now insolvent so my client in fact at this point is KIGA.”

The Guaranty Act that created KIGA excludes “[o]cean marine insurance” and “[a]ny insurance provided, written, or reinsured, or guaranteed by any government or governmental agencies.” Ky. Rev. Stat. § 304.36-030(1)(f),(h).

KIGA argues that insurance for black lung benefits should be considered “[o]cean marine insurance” based on the broad definition for that term used in the Guaranty Act. “Ocean marine insurance” is defined as “any form of insurance . . . that insures against maritime perils or risks and other related perils or risks, that are usually insured against by traditional marine insurance such as hull and machinery, marine builders risk, and marine protection and indemnity.” Ky. Rev. Stat. § 304.36-050(10). It was obvious to the court that an underground coal mine had no relevance to “ocean marine” insurance since it was not even near an ocean let alone an operation dealing with an ocean or marine activities.

The committee that created the model law on which the Guaranty Act was based intended for the provision to exclude flood and crop insurance that are covered by government guaranty programs. These federal programs do involve formal arrangements between insurance companies and the government. The Black Lung Benefits Act instead seeks to require private mine operators to pay benefits to the maximum extent feasible. It only provides for the Trust Fund to assume liability when there is no operator who is liable for the payment of such benefits.

The Trust Fund has not “guaranteed” the Black Lung Benefits Act coverage under Kentucky law. The KIGA exception for claims “guaranteed by . . . governmental agencies” therefore does not apply.

CONCLUSION

Since the court had personal jurisdiction over KIGA and address the merits of its claims. The exclusions in the Guaranty Act do not apply because the Black Lung Benefits Act coverage in this case is not “ocean marine insurance” nor is it “guaranteed by . . . governmental agencies.” KIGA, therefore is liable for coverage issued by Frontier, the now-insolvent insurer.

ZALMA OPINION

The Black Lung Benefits Act requires private mine operators to pay benefits to the maximum extent feasible. It only provides a Trust Fund to assume liability when there is no operator who is liable for the payment of such benefits. The operator purchased insurance to protect it from that exposure and the insurer contributed to the KIGA fund to protect its insureds in the event of its insolvency. Since an underground coal mine had no relevance to “ocean marine” insurance, not being near an ocean, let alone an operation dealing with an ocean or marine activities, and  since KIGA is guaranteed and funded by insurers, not a governmental agency, KIGA was responsible for the loss.

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Why Pennsylvania Made it Easier to Prove Insurer Bad Faith

No Need to Prove Ill-Will or Self-Interest to Prove Bad Faith

Since its creation as a tort in the 1950’s and 1960’s the tort of bad faith required proof the the insurer will do nothing which will injure the right of the insured to receive the benefits
of the agreement. The basic definition of the tort of bad faith just looks to the actions of the insurer in dealing with an insured without any further evidence that the injury caused to the insured was due to an act of bad faith.

The Supreme Court of Pennsylvania, Western District, found that neither self-interest nor ill will is necessary to a finding of bad faith. In so doing, in Matthew Rancosky, Administrator DBN of The Estate Of Leann Rancosky And Matthew Rancosky, Executor Of The Estate Of Martin L. Rancosky v. Washington National Insurance Company, As Successor By Merger To Conseco Health Insurance Company, Formerly Known As Capital American Life Insurance Company, J-27-2017, No. 28 WAP 2016, Supreme Court Of Pennsylvania Western District (September 28, 2017) made it easier for a plaintiff to sue an insurer for bad faith by removing an earlier requirement that there must be proof of ill-will or self-interest.

Justice Wecht of that court wrote a concurring opinion, to the majority opinion of the Supreme Court of Pennsylvania, Western District, joining the Majority Opinion in full while explaining why it is important in Pennsylvania to eliminate the need for a plaintiff to prove self-interest or ill-will to establish a case of bad faith.

PROOF OF BAD FAITH

As a matter of statutory interpretation, the Majority demonstrated astutely that “proof of the insurer’s subjective motive of self-interest or ill-will, while perhaps probative of the previous tests of bad faith, is not a necessary prerequisite to succeeding in a bad faith claim. If the plaintiff can prove that the insurer acted to deprive the insured of the benefits of the policy to which the insured was entitled, should be sufficient to prove the tort.

It bears emphasizing that “self-interest” and “ill will” are not part of Section 8371 as enacted by the General Assembly. This is unsurprising, inasmuch as such strains of overt malfeasance often will be lacking and, in any event, will seldom be susceptible to establishment by competent proof of record. That is to say, with apologies to the drafters of the 1990 edition of Black’s Law Dictionary, those terms not only are non-mandatory under Pennsylvania’s bad faith statute; they generally are analytically unhelpful as well.

Justice Wecht pointed out that many species of bad faith may flourish notwithstanding the absence of either “self-interest” or “ill will.” For example, he explained that:

  • Shoddy claims-handling,
  • lack of diligence,
  • non-responsiveness,
  • haphazard investigation,
  • unreasonable denials, and the like

are sufficient to prove that the insurer acted in bad faith since all can come within the statutory definition of bad faith while nonetheless falling short of the “self-interest”/”ill will” threshold.

“Ill will” suggests an unduly personal or vindictive motive, something that is (and indubitably should be) exceptionally rare.

In the universe of bad faith insurance claims, “ill will” is more often than not a red herring. It is a waste of court time to deal with an unnecessary and useless item of evidence. “Self-interest” suggests that an adjuster or other claims-handler perceives some personal financial benefit that will follow from denial of a claim, something that, while plausible in theory, certainly is far from universal in bad faith cases.

In any event, these terms cannot be permitted to devour the definition of bad faith as a whole. Knowing or reckless claims-handling leading to objectively unreasonable denial of benefits, if proven by clear and convincing evidence, embodies the principle that a patent absence of good faith is tantamount to the presence of bad faith.

Unless the Pennsylvania General Assembly intervenes to supersede the Majority’s understanding of the legislative will, this is the rule that our courts must apply.

ZALMA OPINION

I have no love for the tort of bad faith. I personally believe it is a breach of the ancient division between contract and tort. In most cases the insurance adjuster deals fairly and in good faith with the insureds with whom the adjuster comes in contact. He or she receives no personal financial benefit other than the salary agreed to before a claim was filed. Adjusters are hired to fulfill the promises made by the insurance policy. When the adjuster fails the insured has the right to seek contract damages.

Making it easier to sue insurers for bad faith will cure no ills other than to increase the earnings of the plaintiffs’ lawyers. However, if there must be a tort of bad faith, then the rule stated by Pennsylvania is appropriate since neither ill will nor self interest are required to determine whether the insurer did something to prevent the insured from receiving the benefits of the policy.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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Zalma’s Insurance Fraud Letter – October 1, 2017

Zalma’s Insurance Fraud Letter

Barry Zalma, Inc.

The Essential Resource For The Insurance Fraud Professional

Thirty eight years ago today I left the world of the employed and became an entrepreneur by opening my own law firm that was incorporated shortly thereafter as Barry Zalma, Inc. When I opened for business on October 1, 1979, I had no clients other than my sister, and no certainty that I would have any in the future.
21 years ago I started Zalma’s Insurance Fraud Letter. I hope you find this issue interesting and useful.

Zalma’s Insurance Fraud Letter, Volume 21, No. 19

  • October 1, 1979 – October 1, 2017 – Another Anniversary
  • Become a Certified Expert in Corporate Property Insurance and a Certified Expert in Corporate Liability Insurance
  • If you do the Crime You Must Do the Time
  • California Workers’ Comp Division Suspends 6 Medical Providers for Fraud
  • It’s Not Nice to Lie to Your Insurer
  • DOJ Announces Hurricane Fraud Units In Effect
  • The Zalma Insurance Claims Library
  • Good News From the Coalition Against Insurance Fraud
  • Health Insurance Fraud Convictions
  • Other Insurance Fraud Convictions

 Zalma on Insurance – A Blog

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

 Zalma’s Insurance 101

I have completed a video blog called that consist of 1022 three to four minute videos starting with “What is Insurance” and moving forward to insurance fraud investigations explaining the basics of insurance and insurance claims handling in a painless fashion that can be viewed every morning with the first cup of coffee at  Zalma’s Insurance 101.

The videoblog is adapted from my book, Insurance Claims: A Comprehensive Guide available at the Zalma Insurance Claims Library.
If you start at Volume 1 at the bottom of the blog’s first page and view one or two videos a day you will have approximately 12 to 24 hours of training a year until you get to the last video.

 New Blog: 

Insurance Law Commentary

You can see video commentary and read two serialized novels at http://zalma.com/insvideo.

“Arson for Profit” and“Murder & Insurance Fraud Don’t Mix”
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20 Years after Notice of Claim Violates Notice Condition

Service Of a Lawsuit Requires Prompt Notice to Liability Insurer

The reason insurance companies put a notice requirement in a liability insurance policy is to protect the insurer against stale claims and fraud. Everyone who has ever run a business that has liability insurance know, or should know, that notice of a claim or a potential claim, must report the claim to the insurer so it can investigate and defend the claim. No insured likes the requirement and will attempt to explain a late report.

In J. Peter McPartlon v. Continental Casualty Company; Continental Casualty Company v. J. Peter McPartlon, 1:15-cv-299 (GLS/CFH), 1:15-cv-1520 (GLS/CFH), United States District Court Northern District Of New York (September 26, 2017) an insured did not report a potential suit, a threatened suit and an actual suit within one to five years. The Insured, McParton, sued because the insurer refused coverage seeking damages for an alleged breach of an insurance contract.

His insurer Continental Casualty Company (CCC) defended the claim for damages and a declaratory judgment ordering CCC to indemnify and defend him against claims in an underlying state court personal injury lawsuit. McPartlon also alleges that CCC acted in bad faith.

CCC, thereafter, commenced a related action seeking a declaration that it has no duty to indemnify or defend McPartlon in a separate but related underlying state court personal injury lawsuit.

BACKGROUND

McPartlon has owned numerous rental properties in the City of Albany and the greater Capital District area, including 72 Park Avenue, Albany, New York, which is the property at issue. McPartlon operated his rental property business under various business organizations. By approximately 2005, McPartlon had delegated the day-to-day business operations to his son, Michael McPartlon, and he consented to be bound by his son’s deposition testimony in the actions before this court.

CCC issued insurance policies to McPartlon on his rental properties that were in effect during relevant times.

CCC’s insurance policies place a duty on McPartlon to notify CCC in the event of an “occurrence” or “suit” against him “as soon as practicable.” Under the policy, an “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

Following a 1993 environmental investigation at 72 Park Avenue, Albany, New York, the Albany County Department of Health (DOH) notified Donna Witko of Parkland Management that “an elevated blood lead level has been verified in a child.”

The affected child was Rashiek Haynes, who is the plaintiff in one of the underlying state court lawsuits. Rashiek Haynes is a sibling of Nakira Haynes, the plaintiff in the other underlying state court lawsuit. McPartlon did not disclose the results of this investigation to CCC until approximately August 2015.

On or about July 24, 2013, McPartlon was served in the underlying state court lawsuit commenced by Nakira Haynes. Among other things, Nakira Haynes alleged that McPartlon was negligent in failing to abate lead paint hazards, which caused her injuries.

McPartlon did not notify CCC about the underlying lawsuit until June 17, 2014 by letter from his corporate counsel addressed to “CNA Insurance.” As a result of McPartlon’s untimely notice, CCC denied coverage as to Nakira Haynes’ underlying state court lawsuit.

After service of Nakira Haynes’ lawsuit, McPartlon’s son, Michael, realized that he had not kept the pertinent insurance policies. In order to identify his then-unknown insurance carrier, Michael testified that a “week or two” after being served: (1) he searched McPartlon’s property for boxes labeled “do not destroy,” which would likely contain the oldest corporate documents; (2) he contacted a former business colleague and Witko; (3) he telephoned three out of five of his insurance brokers; and (4) McPartlon searched his personal records. All attempts were unsuccessful.

Ultimately, by June 2014, Michael remembered that another family business had insurance through CNA, an affiliate of CCC, and this prompted his letter tendering a claim to CCC about the underlying Nakira Haynes state court lawsuit.

Rashiek Haynes filed suit against McPartlon in December 2014 for personal injuries related to lead exposure.

Because of the 1994 DOH report in or around August 2015, CCC sought a declaration that it has no duty to indemnify or defend McPartlon in Rashiek Haynes’ lawsuit since waiting 20 years after notice to McParlton was not reporting as soon as practicable.

DISCUSSION
Nakira Haynes’ Underlying State Court Lawsuit

CCC argued that it does not have a duty to defend or indemnify McPartlon in the underlying state court lawsuit brought by Nakira Haynes because he failed to provide timely notice of the 1994 DOH report, which is an “occurrence” under the policy. CCC also argued that McPartlon failed to provide timely notice of Nakira Haynes’ lawsuit itself. Specifically, CCC contends that McPartlon’s failure to provide notice of the 1994 DOH report for approximately twenty years or of Nakira Haynes’ lawsuit for almost eleven months bars his insurance coverage as to that suit. Additionally, CCC asserts that McPartlon has failed to satisfy his burden that his untimely notice was justified or excused.

An insurance contract stating that the insured must notify the insurer of an occurrence or claim “as soon as practicable” requires that notice be provided within a reasonable time under the circumstances. Failure to give timely notice vitiates the contract as a matter of law.

An insured has a duty to give notice when he or she “could glean a reasonable possibility of the policy’s involvement” based on “the information available relative to the accident.” Paramount Ins. Co. v. Rosedale Gardens, Inc., 293 A.D.2d 235, 239-40 (1st Dep’t 2002). Although a delay may be excused in some circumstances, the insured bears the burden of proof.

McPartlon argued that the 1994 DOH report did not specifically identify information that would put him on notice of a potential claim. Contrary to the claim, the 1994 DOH report specifically identified a minor with an elevated blood lead level who resided at the apartment and conditions that violated Public Health Law. Further, the report required that repairs to remedy the violations be completed within fourteen days or “legal action w[ould] be initiated by [DOH].”

Undoubtedly, the 1994 DOH report allowed McPartlon to “glean a reasonable possibility of the [insurance] policy’s involvement.” Paramount Ins. Co., supra. Accordingly, the 1994 DOH report was an “occurrence” under the policy, which would trigger McPartlon’s notice requirements to CCC.

Furthermore, McPartlon failed to satisfy his burden to present a question of fact regarding whether his late notice was justified. All of these excuses rest on the premise that an insurer bears the burden of an insured’s own negligence in maintaining his records and, therefore, fail as a matter of law. Indeed, it is the responsibility of the insured, not the insurance company, to keep track of which carriers have provided it with liability insurance.

At no point before his tender letter did McPartlon consult counsel or an insurance broker.  McPartlon failed to raise a question of fact that he made reasonably diligent efforts to ascertain whether coverage existed.
Rashiek Haynes’ Underlying State Court Lawsuit

As with Nakira Haynes’ lawsuit, CCC contended that it does not have a duty to defend or indemnify McPartlon in the underlying state court lawsuit brought by Rashiek Haynes because McPartlon failed to provide timely notice of the 1994 DOH report, which is an “occurrence” under the policy.
BAD FAITH

McPartlon claims that CCC acted in bad faith in denying coverage as to the underlying state court lawsuit brought by Nakira Haynes. CCC argues that McPartlon’s bad faith claim fails as a matter of law because there is no cognizable claim for the denial of insurance in New York where an insurer has an arguable basis to disclaim coverage. McPartlon cited no evidence that CCC lacked an arguable basis to disclaim coverage or otherwise acted in bad faith.

CCC had a basis to deny coverage regarding Nakira Haynes’ underlying lawsuit because McPartlon failed to provide timely notice of the suit. CCC also had a basis to deny coverage based on McPartlon’s failure to provide timely notice of an “occurrence.”

The court concluded that CCC is entitled to summary judgment on McPartlon’s bad faith claim.

ZALMA OPINION

The suit brought by the McParlton’s was obviously inadequate verging on silly. Expecting a defense almost 20 years after notice is clearly in breach of the notice condition requiring notice as soon as practicable nor is waiting a year after being served with a suit in compliance with the “as soon as practicable” notice requirement. A person, like McParlton, who sits on his rights loses them. There was no need for the insurer to show prejudice since a 20 year delay makes the fact of prejudice obvious.

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

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He Who Represents Himself in Court Has a Fool For a Client

Facts Stating a Cause of Action Required to Stay in Court

Normally, I digest reported decisions to make them easier to digest. Today, in Harold Greene v. USAA Casualty Ins. Co., et al., Civil No. JKB-17-1854, United States District Court For The District Of Maryland, (September 25, 2017) I post the entire case because it is clear, brief, and cogent.

Plaintiff Harold Greene filed suit pro se on May 19, 2017, in the District Court of Maryland against USAA Casualty Insurance Company (“USAA”), Thomas E. Price, M.D., Secretary of the United States Department of Health and Human Services, and the Centers for Medicare and Medicaid Services (the latter two Defendants referred to collectively as “the Government”). The stated causes of action were contract, replevin, and bad faith insurance claim. Greene alluded to “extortionate government subrogation” and wanted “pain and suffering settlement . . . funds” from USAA to be paid into the court’s registry “to protect MEDICARE.”

The Government removed the case to this Court because of its jurisdiction over cases against federal agencies. Subsequently, USAA moved to dismiss the complaint for failure to state a claim, to which Greene filed his response in which he complained that USAA had “low balled” his car damage claim.

The Court granted the motion to dismiss and concurrently dismissed sua sponte the complaint against the Government; the Court concluded that, even after liberally interpreting Greene’s complaint, it was unable to discern a viable cause of action in the case. Consequently, the case was dismissed for failure to state a claim.

Now pending before the Court is Greene’s motion for reconsideration, which complains the “court’s ruling was improvidently based upon its construing an interpleader petition as a ‘complaint’ asserting ‘claims.'” What Greene filed is, in fact, appropriately construed as a complaint since it is so labeled, since it purports to assert causes of action of contract, replevin, and bad faith insurance claim, and since it asks the court to award damages. However, it fails to include sufficient factual content to permit an inference of wrongdoing by either USAA or the Government.

Accordingly, IT IS HEREBY ORDERED that Greene’s motion for reconsideration is GRANTED, that the Court has reconsidered its ruling, and that the Court AFFIRMS its dismissal of this case for failure to state a claim for relief. The Clerk SHALL SEND a copy of this memorandum and order to Plaintiff.

DATED this 25th day of September, 2017.

BY THE COURT:

James K. Bredar

United States District Judge

ZALMA OPINION

Pro se plaintiffs take up the time of US Courts by filing documents that, like this case, make no sense, allege no appropriate facts sufficient to state a cause of action and mix oranges with pomegranates. The plaintiff included a claim on his damaged auto with a suit against the Secretary of Health and Human Services about the failure of Social Security. Since it made no sense and failed to state any cause of action it was dismissed.

 

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

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Bankruptcy is Not a Cure of Mortgagor’s Failure to Pay Insurance Premiums

Never Lie to a Judge

Mortgages invariably require the property owner to buy, and name as loss payee, the mortgagee. When premiums are not paid and a policy is cancelled the mortgagee has the right to force place insurance to protect its security, and if not paid for by the mortgagor, foreclose on the property. Bankruptcy puts a hold on the foreclosure until the court rules.

In In Re: John Harrison Scott, Debtor, John Harrison Scott v. Nationstar Mortgage, LLC, CASE NO. 15-33611-BJH-13, Adversary No. 16-3106-BJH, United States Bankruptcy Court For The Northern District Of Texas Fort Worth Division, (September 22, 2017) trial was held in Bankruptcy Court to resolve a dispute over foreclosure for failure to insure.

FACTUAL BACKGROUND

Plaintiff and his current non-debtor spouse (together, “Borrowers“) took out a home equity loan from Lender secured by the Property in the amount of $183,200.00.

The Note required Borrowers to make monthly payments of $1,188.23 on the first day of each month beginning May 2005. If Borrowers failed to pay the full amount of each monthly payment on or within fifteen days of the monthly due date, Borrowers would become obligated to pay a late charge.

When Defendant began to act as servicer for Lender in December 2013, Borrowers were in default under the Loan Documents because of a prior late payment.

Insurance Escrow Disputes

The Security Instrument requires Borrowers to keep the Property insured against loss. If Borrowers fail to maintain the required insurance coverage on the Property, the Security Instrument permits Lender to establish an escrow account and to obtain force-placed insurance coverage for the Property, at Borrowers’ expense (and such costs constitute additional debt under the Loan Documents). Plaintiff’s principal disputes with Lender and Defendant can be traced to the lapse of insurance coverage on the Property due to Borrowers’ failure to pay insurance premiums to their insurance company MetLife.

Plaintiff’s testimony and the documentary evidence demonstrate that Borrowers’ insurance on the Property lapsed or was cancelled on at least two occasions between August 2012 and April 2013.

As a result of the lapse of insurance coverage on the Property, Defendant mailed a letter on March 29, 2014 to Borrowers at the Property address, notifying Borrowers that (a) Defendant’s records indicated Property insurance had expired; (b) Defendant planned to buy force-placed Property insurance at Borrowers’ expense; (c) Borrowers were to immediately provide proof of insurance; and (d) if Borrowers did not provide proof of insurance, Defendant would establish an escrow account for the Note and obtain force-placed insurance coverage on the Property.

As a result of Borrowers’ failure to respond to multiple letters, Defendant obtained force-placed insurance for the Property and notified Plaintiff of the force-placed insurance.  Defendant included a “TEXAS NOTICE OF PLACEMENT OF INSURANCE” with the letter stating, in part, that the insurance premium of $3,073.87 “will be charged to your escrow account. If you do not have an escrow account, one will be established for you or you will be billed directly for the insurance premium paid by us.”

According to Plaintiff, his insurance broker allegedly told him that the homeowners policy had not actually lapsed, but the court concluded “incredibly, his insurance broker allegedly told Plaintiff to take out a second insurance policy on the Property ‘to be safe.'”

Plaintiff’s testimony about the Borrowers’ alleged timely payments to MetLife (without providing any documentary evidence to corroborate Plaintiff’s testimony); Borrowers’ alleged nonreceipt of Defendant’s letters; and Plaintiff’s alleged conversations with his insurance broker was, in the words of the court: “not believable or credible and was contradicted by credible documentary evidence.”

Plaintiff’s testimony that he did not realize the escrow account was being closed was inconsistent and contrary to the documentary evidence, which calls into question the reliability and credibility of Plaintiff’s testimony.

As of the Petition Date, Borrowers were at least seven months in arrears on their payments.

The Court found that (a) Defendant was entitled under the Loan Documents to hold and “suspend” payments received from Borrowers until Defendant received sufficient funds to apply to a full monthly payment due under the Note; (b) Defendant was entitled to require Borrowers to pay the Escrow Items under the Loan Documents; (c) Defendant gave proper written notice that it would require Borrowers to pay the Escrow Items; and (d) Defendant did nothing improper with respect to its filed proof of claim.

Chapter 13 Bankruptcy

Plaintiff filed his Chapter 13 petition with this Court on September 1, 2015, preventing Defendant from foreclosing on the Property. Defendant—on behalf of Lender—filed a proof of claim in the bankruptcy case on November 20, 2015, asserting a secured claim of $166,248.05, including arrearages as of the Petition Date of $14,361.03. The Confirmation Order provided that the Trustee’s Recommendation Concerning Claims (“TRCC“) would be binding on all parties concerning allowance and treatment of claims in the absence of an objection.

On March 18, 2016, the Trustee filed his TRCC, which had a proposed claim amount for Lender of $166,248.05, to be paid directly to Lender by Plaintiff with only the proposed arrearages of $14,361.03 to be paid through the Trustee. No one objected to the TRCC.

Adversary Proceeding

Plaintiff testified on his own behalf. Plaintiff initially came across as very credible, but as he testified, his testimony contradicted the documentary evidence on several key issues and ultimately was not credible or persuasive. The witnesses’ respective credibility was critical to the Court in rendering its alternative ruling on the merits.

LEGAL ANALYSIS

Res judicata may be raised by the court where both actions were brought in courts of the same district. Second, res judicata may be applied when all relevant data and legal records are before the court and the demands of comity, continuity in the law, and essential justice mandate judicial invocation of res judicata.

A bankruptcy judgment bars a subsequent suit when (a) both cases involve the same parties; (b) the prior judgment was rendered by a court of competent jurisdiction; (c) the prior decision was a final judgment on the merits; and (d) the same cause of action is at issue in both cases.

Because the Court raised res judicata on its own, and because all of the elements of res judicata are present, Plaintiff’s claims against Defendant are barred.

Plaintiff’s claims are barred by res judicata because such claims should have been, but were not, raised in connection with the TRCC Order that allowed Defendant’s claim. Even if the Court were to reach the merits of Plaintiff’s claims, they fail for the reasons set forth above.

ZALMA OPINION

Insurance protecting the mortgagee’s interest in property is important to the mortgagee. State law allows it to force place insurance – at the mortgagor’s expense – if the mortgagor fails to maintain insurance and add the cost to the mortgage. The Mortgagor was in arrears on both the mortgage payments and payments for insurance and the mortgagee properly foreclosed. Testifying falsely to the Bankruptcy Court simply added to the mortgagor’s problems and caused a loss.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

 

 

 

 

 

 

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It’s Not Nice to Lie to Your Insurer

A Livery Vehicle is not an “Automobile” for No Fault Insurance Purposes

When an insured, operating a livery and taxi service obtains an insurance policy covering one of its vehicles as a private passenger vehicle knowing that its application for insurance was false found itself without insurance of any kind. The lies, even insuring the property in the name of a person who neither owned nor operated the vehicle was egregious and fraudulent.

In 21ST Century Insurance Company, individually, and as attorney in fact for Myriam Ledee, v. Felipe Express; Felipe Sanchez Jr.; Felipe Sanchez Sr.; Edward Santana; Perfecto Hernandez; Lucia Hernandez; and Milton Saeteros; et al., Civil Action No. 15-7075 (FLW) (DEA), United States District Court District Of New Jersey (September 22, 2017) the USDA was asked to declare the policy void and not compel the insurer to pay innocent passengers under New Jersey’s Deemer statute.

FACTS

Following an automobile accident on the New Jersey turnpike, Plaintiff 21st Century Centennial Insurance Company (“21st Century” or “Plaintiff”) initiated this action (the “21st Century case”) against various defendants. The present dispute centers on 21st Century’s claims against Felipe Sanchez, Sr., Felipe Sanchez, Jr., and Felipe Express (collectively, the “Felipe Defendants”) for insurance fraud under the Insurance Fraud Prevention Act (“IFPA”), N.J.S.A. 17:33A-1 et seq. and common law fraud, as well as its claim seeking a declaration that 21st Century has no coverage obligations under a policy of insurance that it issued to Myriam Ledee.

The relevant 21st Century policy of insurance (the “Policy” or “21st Century Policy”) lists Myriam Ledee, an Ohio resident and the ex-wife of Felipe Sanchez, Jr., as the named insured. Defendants Felipe Sanchez, Sr. and Felipe Sanchez, Jr. are the owners of Felipe Express, a transportation company that operates out of Silver Springs, Maryland. Felipe Express provides transportation and taxi services, for a fee, to members of the public between the Washington, D.C. and New York City areas, including New Jersey.

The underlying facts concerning the accident are undisputed. On March 6, 2015, Defendant Edward Santana, an employee of Felipe Express, was driving the Van on the southbound side of the New Jersey Turnpike, during the course of his employment, when he collided with a vehicle driven by a representative of the New Jersey Turnpike Authority. Perfecto Hernandez and Lucia Hernandez were passengers in the Van at the time of the accident. Lucia alleges that she sustained personal injuries, requiring medical treatment, as a result of the accident.

Ledee testified that she did not submit an application for the Policy, did not give anyone, including Felipe Express, Felipe Sanchez, Jr., and Felipe Sanchez, Sr., permission to obtain the Policy in her name, and was not aware that the Policy had been applied for or obtained prior to the accident.

According to the testimony of Diana Yeager, an underwriting staff consultant for 21st Century, 21st Century conducted business in New Jersey during the relevant policy period, including the date of the subject accident. Yeager testified that during all relevant periods, 21st Century did not issue commercial policies, including policies covering taxis, buses, or delivery vehicles.

The 21st Century policy specifically excluded coverage for liability arising out of the use of a vehicle for commercial purposes.

DISCUSSION

The Court found that default judgment is appropriate against the Felipe Defendants on all counts, because Plaintiff has established a prima facie case for relief.

The New Jersey Legislature enacted the IFPA to “confront aggressively the problem of insurance fraud in New Jersey.” N.J.S.A. 17:33A-2. The Legislature added the crime of “insurance fraud” in 2003, as part of a “a comprehensive set of solutions to the automobile insurance availability and affordability challenges facing insurers, consumers and regulators in New Jersey.”

Unlike common law fraud, proof of fraud under the IFPA does not require proof of reliance on a false statement or resultant damages. “The applicable burden of proof to prove a violation of the IFPA is a preponderance of the evidence.” Certain Underwriters at Lloyd’s of London v. Alesi, 843 F. Supp. 2d 517, 530 (D.N.J. 2011).

The unchallenged facts in this case demonstrate that the Felipe Defendants knowingly made false representations to 21st Century in order to obtain the Policy. In that regard, it is undisputed that the Felipe Defendants submitted an online application to 21st Century for a personal insurance policy in the name of Myriam Ledee, knowing that that policy procured would be used to cover the Van. In his deposition, Felipe Sanchez, Jr. admitted wrongdoing in procuring a personal policy in the name of Ledee, despite knowing that the Policy would be used for commercial purposes to insure the Van.

Because 21st Century has been prejudiced by the Felipe Defendants’ failure to defend this action, and no facts suggest that the Felipe Defendants would have a meritorious defense against the common law fraud claim. Accordingly, the Court finds that default judgment against the Felipe Defendants as to liability for common law fraud is appropriate.

RESCISSION

Within the field of insurance, rescission has long been recognized as an available and necessary remedy to combat fraudulent behavior by an insured.

Here, the Felipe Defendants made material and fraudulent misrepresentations by applying for a personal policy of insurance using the identity of Ledee. By failing to disclose their true identities, the Felipe Defendants deprived 21st Century of the opportunity to examine the driving histories and other relevant records of the Felipe Defendants.  Under New Jersey law, the Court found that 21st Century is entitled to rescind the Policy as it pertains to the Felipe Defendants, precluding the Felipe Defendants from seeking any coverage as insureds.

21ST CENTURY’S COVERAGE OBLIGATIONS FOR THE PASSENGERS

Notwithstanding the Court’s entry of judgment against the Felipe Defendants, and declaration that the Policy is void ab initio, the Court must determine whether 21st Century has any coverage obligations to the Passengers, who were innocent third-party victims in the accident. In that regard, as discussed in greater detail below, it is well-established under New Jersey law that innocent third-party victims of automobile accidents can, under certain circumstances, recover benefits under a policy that is declared void ab initio on the basis of fraud by the named insured.

By 1985, New Jersey was confronted with a growing number of cases where New Jersey residents were injured in accidents caused by out-of-state drivers whose insurance coverage was less than New Jersey’s statutory requirements. The New Jersey Legislature enacted N.J.S.A. 17:28-1.4, commonly referred to as the “deemer statute,” as part of the state’s no fault insurance plan. If the Van qualifies as an “automobile,” New Jersey’s policy of compensating innocent third-party victims of automobile accidents would require 21st Century to provide the Passengers with the minimum statutory insurance requirements set forth in the deemer statute.

The deemer statute provides, in pertinent part, that automobile insurers, such as 21st Century, who issue policies outside of New Jersey, but are authorized to issue automobile insurance policies within the state, “shall include in each policy coverage to satisfy at least the liability insurance requirements of [the No Fault Act] . . . , whenever the automobile . . . insured under the policy is used or operated in this State.” N.J.S.A. 17:28-1.4. The deemer statute incorporates the following definition of “automobile,” requires it to be a “private passenger automobile of a private passenger or station wagon type that is owned or hired and is neither used as a public or livery conveyance…”

Because the Van was used as a public or livery conveyance, and customarily used in the occupation, profession or business of the insured, the Court found that the Van does not constitute an “automobile,” regardless of whether it falls under the first or second vehicle classification set forth in N.J.S.A. 39:6A-2.

At time of the accident, Santana was employed as a driver for Felipe Express, and the Van was customarily used as a transportation vehicle for Felipe Express. Because the Van was customarily used in the occupation, business, or profession of Santana, it does not qualify as an automobile under the deemer statute. Because the deemer statute only applies policies covering “automobiles,” the Court’s finding that the Van is not an automobile is fatal to the Passengers’ attempt to seek coverage under the deemer statute.

The Court concluded that it could not extend the deemer statute and to cover the innocent Passengers and that they are not entitled to coverage despite their status as innocent third-party victims of the accident, because the deemer statute is not triggered where the vehicle in question is not an “automobile.”

ZALMA OPINION

Although it is sad that the innocent passengers are unable to collect from 21st Century Insurance to compel the insurer to pay when it was the victim of fraud would have been unconscionable. The owners and operators of the vehicle will be held responsible and required to use its assets to pay for the injuries suffered by the innocent victims of the accident.

 

© 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

 

 

 

 

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A Jury is not Allowed to Speculate About Damages

When Seeking Coverage Of A Settlement Of Covered and Not Covered Losses the Insured Must Prove Allocation

When an insured seeks coverage for a multi-lawsuit settlement where one plaintiffs action is covered by the policy and the other is not, it is the duty of the insured to prove the allocation between covered and not covered losses. Failure to do so can, and in UnitedHealth Group Incorporated, a Minnesota corporation v. Executive Risk Specialty Insurance Company; First Specialty Insurance Corporation; Starr Excess Liability Insurance International Limited; National Union Fire Insurance Company of Pittsburgh, PA, No. 15-1076, United States Court of Appeals For the Eighth Circuit (September 7, 2017) did, cost the insured covereage.

FACTS

UnitedHealth Group sued several insurers in the District of Minnesota, seeking indemnity and defense costs for underlying litigation settlements under its professional liability excess insurance policies. UnitedHealth appeals the district court’s grant of summary judgment in favor of four insurance companies.

UnitedHealth reached a single lump-sum settlement for the two actions together. There was potential insurance coverage for claims in one lawsuit but not for claims brought in the other. A dispute then arose over how to allocate the settlement amount between the covered and non-covered claims.

UnitedHealth settled the the various lawsuits resolving the AMA and Malchow suits for $350 million. The settlement agreement did not state how the $350 million was to be allocated between the AMA plaintiffs and Malchow plaintiffs.

The AMA and Malchow plaintiffs moved to be certified as a settlement class before Judge McKenna in New York. The court reviewed the settlement agreement and held a seven-day evidentiary hearing to determine whether the settlement was fair and reasonable. In October 2010, Judge McKenna certified the settlement class, approved the $350 million settlement, and dismissed the AMA suit. Following the court’s approval, and in accordance with the settlement agreement, the Malchow plaintiffs stipulated to the dismissal of the Malchow suit in New Jersey.

After signing the settlement agreement, UnitedHealth filed an amended complaint in this ongoing lawsuit in the District of Minnesota against its professional liability excess insurers. UnitedHealth sought damages for the insurers’ failure to indemnify it for the costs to defend and the $350 million gross settlement.

After several years of litigation, four excess insurers remain in this action: Executive Risk Specialty Insurance Company, First Specialty Insurance Corporation, Starr Excess Liability Insurance International Limited, and National Union Fire Insurance Company (collectively, the “Insurers”). Executive Risk holds the first excess insurance policy relevant to this appeal; coverage attaches at $95 million in damages. The others provide coverage at higher levels of damages.

The Insurers moved for partial summary judgment.  The trial court ruled that UnitedHealth had the burden to allocate the settlement between the potentially covered AMA claims and the non-covered Malchow claims.

The trial court ruled that UnitedHealth failed to meet its burden to present sufficient evidence to support an allocation between the potentially covered AMA claims and the non-covered Malchow claims. The court also ruled that the Insurers were entitled to summary judgment on UnitedHealth’s claim for defense costs in the AMA suit.

ANALYSIS

UnitedHealth argues that it had no duty to allocate between the covered and non-covered claims under the plain language of its insurance policies. Second, it argues that under Minnesota law, it had no burden to allocate between the covered and non-covered claims and it was required to show only that it suffered a loss that would trigger coverage.

The company contends that under the Antitrust Endorsement of the policy issued by the primary insurance carrier Lexington, which it asserts is incorporated into the excess insurance policies, UnitedHealth is entitled to coverage for the entire $350 million settlement so long as the settlement included covered antitrust claims. The trial court determined that this argument was untimely and meritless. In its amended complaint, UnitedHealth sought indemnity for only the “portion” of the $350 million settlement attributable to the AMA suit. Its claim that it can recover the entire $350 million, including the amount attributable to the Malchow suit, was not timely advanced and was ignored by the appellate court.

The AMA suit qualifies for coverage under the Antitrust Endorsement. The Endorsement provides that notwithstanding any other provisions of the policy, the Insurers must pay for UnitedHealth’s “claims that directly or indirectly result from or are related to, a Wrongful Act consisting or allegedly consisting in whole or in part of anti-trust, price fixing or restraint of trade activities.” But the Malchow claim was separate from the AMA claim, so the Endorsement generates coverage only for the AMA claim.

The excess insurance policies provide coverage described in the Endorsement only insofar as the coverage would not conflict with a provision of the excess policies. And it is undisputed that the excess policies did not cover the Malchow claims, because the defendant in Malchow, a predecessor-in-interest of UnitedHealth, was never an insured under those policies. UnitedHealth is therefore not entitled to the portion of the settlement that is allocated to the Malchow lawsuit.

Under Minnesota law, the initial burden is on the insured to prove prima facie coverage of a third-party claim under a liability insurance policy. If the insured meets its burden of establishing coverage of the claim, the burden shifts to the insurer to prove the applicability of an exclusion under the policy as an affirmative defense. Although this general burden-shifting scheme is clearly established, the Minnesota Supreme Court has not squarely addressed who bears the burden to allocate between covered and non-covered insurance claims.

The appellate court concluded it is not enough under Minnesota law for UnitedHealth to show simply that its $350 million settlement included a covered claim of an unspecified amount. UnitedHealth bears the burden to allocate the settlement between the potentially covered AMA suit and the non-covered Malchow suit with enough specificity to permit a reasoned judgment about liability.

To prove allocation, parties can present testimony from attorneys involved in the underlying lawsuits, evidence from those lawsuits, expert testimony evaluating the lawsuits, a review of the underlying transcripts, or other admissible evidence. To survive summary judgment, an insured need not prove allocation with precision, but it must present a non-speculative basis to allocate a settlement between covered and non-covered claims. The district court concluded that UnitedHealth failed to provide non-speculative evidence to allocate the $350 million settlement between the potentially covered AMA suit and non-covered Malchow suit.

The allocation inquiry examines how a reasonable party in UnitedHealth’s position would have valued the covered and non-covered claims. In evaluating the claims, the appellate court looked to what the parties knew at the time of settlement. In determining what claims were settled, it is appropriate to consider the circumstances and events leading up to the settlement. Events and circumstances happening after settlement are relevant only insofar as they inform how a reasonable party would have valued and allocated the claims at the time of settlement.

A jury may not base its damages award on speculation. The evidence presented by UnitedHealth fails to give a jury more than a speculative basis on which to allocate the $350 million settlement between the AMA and Malchow suits.

These were complex lawsuits involving different claims and legal theories. Allocation required either contemporaneous evidence of valuation or expert testimony on relative value to provide a reasonable foundation for a jury’s decision. Without more evidence about the relative value of the claims, a reasonable jury could only speculate as to how the settlement should be allocated.

UnitedHealth made strategic decisions to invoke attorney-client privilege and work-product protection to avoid presenting evidence from its own representatives about contemporaneous valuations of the settlement. UnitedHealth had an opportunity to raise its objection to the district court’s summary-judgment procedure before it stipulated to the entry of final judgment.

ZALMA OPINION

Hoist on its own petard, UnitedHealth refused to present the evidence it had that wold allow a jury to hear sufficient evidence about how the $350 million settlement should be allocated. To do so they needed the testimony of their lawyers and experts not a blatant demand for the full settlement without providing evidence. As a result they lost the right to hold the excess insurers.

 

 

 

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Insured v. Insured Exclusion Defeats Claim

Again an Assignment of Claim Is a Loser

When will litigants learn that it is not always profitable to take an assignment from tortfeasors. If the tortfeasor has sufficient assets to pay a judgment there is no reason to enter into a deal with the tortfeasor to get a chance at obtaining punitive damages from an insurer. Giving up a bird in hand for millions in the bush is a fools errand.

That lesson as learned by the plaintiffs in Intelligent Digital Systems, LLC, Russ & Russ Pc Defined Benefit Pension Plan, Jay Edmond Russ, all individually and as assignees of Jack Jacobs, Robert Moe, Michael Ryan and Martin cFeely, and Jason Gonzalez, Plaintiffs-Appellants v. Beazley Insurance Company, Inc., United States Court Of Appeals For The Second Circuit, 16-3548-cv, (September 19, 2017).

Intelligent Digital Systems, LLC (“IDS”), Russ & Russ PC Defined Benefit Pension Plan (the “Plan”), and Jay Edmond Russ, all individually and as assignees of insured individuals Jack Jacobs, Robert Moe, Michael Ryan, Martin McFeely, and Jason Gonzalez, appealed from the district court’s judgment dismissing the amended complaint and resolving this insurance action in favor of Beazley Insurance Company, Inc. (“Beazley”).

The primary issue is Beazley’s disclaimer of coverage for Russ’s claims against the insured directors of Visual Management Systems, Inc. (“VMS”).

BACKGROUND

Russ is a New York attorney who founded IDS, a technology company in the digital recording industry. Directly and indirectly (through another wholly-owned company), Russ is the sole officer of IDS. He is also the fiduciary of the Plan.

IDS agreed to sell its assets to non-party VMS, a company, now dissolved, in the video technology business. VMS agreed to pay IDS $1.5 million over time and issued a promissory note to that effect, and it agreed also to add Russ to its Board of Directors and to hire him as a consultant.

The VMS Board of Directors met and, after a motion was made and seconded, approved the transaction and Russ’s appointment, conditioned upon completion of the transaction. The transaction closed and VMS’s general counsel confirmed to Russ that Russ would be a director as of its May 2008 meeting. Russ participated in three board meetings and was paid for his services as a board member.

Beazley provided insurance coverage to VMS under a directors and officers liability insurance policy (the “Policy”). The Policy provides that “[t]he Insurer shall pay on behalf of the Directors and Officers all Loss which is not indemnified by the Company resulting from any Claim first made against the Directors and Officers during the Policy Period for a Wrongful Act.” The Policy defines “Directors and Officers” to include “all persons who were, now are, or shall be duly elected or appointed directors.” Section III(F) of the Policy contains what the parties refer to as an “insured v. insured exclusion,” which excludes coverage for “any Claim . . . by, on behalf of, or at the direction of any of the Insureds, except and to the extent such Claim . . . is employment-related and brought by or on behalf of any of the Directors and Officers.”

The Policy defines “Insureds” as “the Directors and Officers and the Company.”

Russ later announced that he was resigning from the board and might sue VMS for payments owed under the promissory note. Plaintiffs initiated an action against VMS and the other five directors in March 2009.

Beazley denied VMS coverage under the Policy and cited the insured v. insured exclusion. The litigating parties settled the action, with four directors agreeing to pay a total of $75,000, all five directors agreeing to the entry of judgments against them in amounts exceeding $2 million, plaintiffs agreeing to “unconditionally forbear collection” of the judgments against the five directors, and all five directors assigning their rights under the Policy to plaintiffs.

Plaintiffs sued Beazley and sought indemnification for the unpaid amounts of the judgments. After trial the jury found that Russ had been duly elected or appointed within the meaning of the Policy. Final judgment was entered in Beazley’s favor.

DISCUSSION

Two principal issues are presented:

(1)           whether the insured v. insured clause applies to this case, and

(2)           assuming it does, whether Russ was duly elected or appointed a director.

Under New York law, which the parties agree applies to the Policy, “insurance policies are interpreted according to general rules of contract interpretation.” This initial interpretation of the contract and whether its terms are ambiguous are questions of law for the court and so the appellate court must review the district court’s interpretation of the contract and its terms as if heard for the first time. The court must interpret the contract to give effect to the intent of the parties as expressed in the clear language of the contract and give words and phrases in the contract their plain meaning.

By limiting the trial to the issue of whether Russ was duly elected or appointed, the district court essentially ruled as a matter of law that the insured v. insured clause applied to this case, rejecting plaintiffs’ contention that at a minimum there was ambiguity in the clause and that the exclusion could be read as applying only to claims brought by directors in their capacities as directors.

The insured v. insured exclusion, on its face, exempts from coverage “any” claim brought by, on behalf of, or at the direction of an insured director, unless the claim is employment-related. The exclusion is not limited to claims brought by an insured in his “capacity” as a director. On its face, the exclusion applies to all claims (except employment-related claims) regardless of whether the director brings the claims in an individual or fiduciary capacity. Moreover, the employment-related exception to the exclusion applies only to claims brought by employees – not by consultants, like Russ. Indeed, his consultant’s agreement specified that he was an independent contractor and not an employee.

Accordingly, plaintiffs’ challenge to the application of the insured v. insured exclusion to Russ’s claims fails on the merits.

Assuming the insured v. insured clause applies, the court needed to determine whether Russ was “duly elected or appointed” as a director within the meaning of the Policy. While this question was put to the jury and the jury resolved it against plaintiffs, plaintiffs argue in essence that summary judgment should have been granted in their favor.

The Second Circuit’s review indicated that no ambiguity exists in the Policy. The plain meaning of the phrase “duly elected or appointed” in the Policy’s definition of “Directors and Officers” is that directors must be duly selected, by vote or appointment, in accordance with proper procedures.

Under Nevada law, which the parties agree applies to the bylaws, whether a contract is ambiguous is a question of law that the court may decide on summary judgment. While the bylaws provide that the number of directors was to be determined by the Board “from time to time,” the bylaws do not specify that a formal vote was needed to set or change the number.

By voting unanimously to appoint Russ as its sixth director, the board implicitly – if not explicitly – “determined,” that it would increase its membership to six. Contrary to plaintiffs’ suggestion, the bylaws reference to “newly-created directorships resulting from any increase in the authorized number of directors,” does not explicitly require more formal action by the board.

All of the parties treated Russ as a duly elected or appointed director accordingly the Second Circuit affirmed the judgment of the district court.

ZALMA OPINION

Greed may be good on Wall Street but it has no place in insurance litigation. The policy in this case was clear and unambiguous. The case against the corporation and other directors may have been good since they agreed to large judgments in favor of the plaintiffs as long as the plaintiffs agreed to not collect on those judgments from anyone other than the insurer. Since the insurer owed nothing the tortfeasors walked free from the exposure and the plaintiffs gained nothing giving up their right to collect from the tortfeasors. Greed took away good judgment.

ZALMA-INS-CONSULT © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

 

 

 

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Serial Insurance Criminal Ineffectively Tries to Avoid Waiver of Rights

Insurance Criminal Stays in Jail for Five Years

If nothing else, insurance criminal have chutzpah – unmitigated gall – when it comes to their sentences for fraud. When the jury was deliberating whether to convict or acquit Chellyn Jones, she agreed with the trial judge to waive her right to a jury trial on her prior convictions only to complain, when the jury convicted her, of the enhanced sentence imposed because of her multiple prior convictions.

In The People v. Chellyn Jones, D071746, Court Of Appeal, Fourth Appellate District Division One State Of California, (September 18, 2017) the California Court of Appeal was asked to change her sentence.

FACTS

A jury convicted Chellyn Jones of multiple counts of insurance fraud (Ins. Code, § 1871.4, subd. (a)(1); counts 3-8, 11-20) and grand theft (Pen. Code, § 487, subd. (a); count 21). Jones waived a jury trial and admitted she had served three prior prison terms (Pen. Code, §§ 667.5, subd. (b), 668) and suffered a prior strike conviction (Pen. Code, §§ 667, subds. (b)-(i), 1170.12 and 668). She thereafter pleaded guilty to failing to appear at her sentencing hearing (Pen. Code, § 1320, subd. (b)), and admitted an allegation that she had committed the crime while out on bail (Pen. Code, § 12022.1, subd. (b)). On Jones’s motion the trial court struck her strike prior conviction. It exercised its discretion to also strike her prior prison terms and the on-bail enhancement. The court sentenced Jones to a five-year prison term on count 3, concurrent three-year midterms on counts 4 through 8 and 11 through 20, and concurrent two-year terms on count 21 as well as on her failure to appear conviction.

Jones contends that the trial court failed to fully advise her of her rights; that while the court advised her of her right to a jury trial on the alleged prior convictions, it failed to advise her of her constitutional rights against self-incrimination and confrontation before she admitted the priors. She maintains that her jury trial waiver after the court’s perfunctory advisement at sentencing does not establish she was aware of or understood her other rights with respect to her prior convictions, and there was no evidence her counsel discussed all of these constitutional rights with her, rendering her admissions invalid.

Jones’s jury trial took place over the course of nine days in October 2015. After the jury commenced its deliberations, the court brought up the subject of bifurcating Jones’s prior convictions, and defense counsel advised the court that Jones would admit to the priors. The court then obtained Jones’s waiver of a jury trial.

DISCUSSION

Before accepting a criminal defendant’s admission of a prior conviction, a trial court must advise the defendant of the right to a jury trial on the prior, the right to remain silent, and the right to confront adverse witnesses. A proper advisement and defendant’s waiver of  the right to a jury trial on the priors, in the record establish that the defendant’s admission of the prior conviction was voluntary and intelligent.

A court’s failure to give explicit advisements or obtain the defendant’s waiver is not reversible per se. Instead, the test for reversal is whether the record affirmatively shows that [the admission] is voluntary and intelligent under the totality of the circumstances. In making the decision the appellate court looks to whether the defendant’s previous experience in the criminal justice system demonstrates his or her knowledge and sophistication regarding the legal rights. Thus, where, as here, the transcript does not reveal complete advisements and waivers, the appellate court is required to go beyond the courtroom colloquy to assess the defendant’s claim of error and examine the record of the entire proceeding to determine whether the defendant’s admission of the prior conviction was intelligent and voluntary.

Jones concedes that the appellate court must apply the totality of the circumstances test since this was not a so-called “silent record” case.

Under the circumstances of this case precedent requires that the appellate court affirm the judgment. Immediately after Jones’s trial concluded and the jury was sent out to deliberate, the court advised her of her right to jury trial on her prior convictions, and Jones explicitly waived that right. She had just completed a multi-day trial in which her counsel confronted and cross-examined witnesses, and she chose not to testify or present evidence. Jones had suffered multiple prior convictions, and at least one of them alleged to be a prison prior — a 2005 conviction for identity theft — was the result of a guilty plea, at which she would have received the same warning she claimed she did not get at this trial.

Given these circumstances Jones knew she did not have to admit the prior convictions but could have had a jury or court trial, had just participated in a jury trial where she had confronted witnesses and remained silent, and had experience in pleading guilty in the past, namely, the very conviction that she was admitting.

The fact she waived her jury trial right, even after having just completed a lengthy trial, does not establish she was aware of or understood her other rights with respect to her prior convictions.

The appellate court was required, by precedent, to examine the circumstances of Jones’s experience in the criminal justice system, including Jones’s prior guilty plea, that she in fact understood the nature of her rights.

Accordingly, though trial courts are required to give full advisements and obtain express waivers of all such rights  under the totality of the circumstances in this case, Jones voluntarily and intelligently admitted her prior convictions despite being advised of and having waived only her right to jury trial.

ZALMA OPINION

“Chutzpah” is best defined by the example of a person who murders his parents and then pleads for mercy because he is an orphan. In this case, Jones, a serial criminal who has been convicted of multiple crimes, has pleaded guilty to a crime, and has spent much time in court rooms, and who committed an additional crime while out on bail, could not convince the court she was deceived when asked to waive her right to a jury trial about prior convictions she knew the state would have no problem proving. She wasted the court’s time and will serve five years.

ZALMA-INS-CONSULT © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

 

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L’Shana Tova

Happy new year to all who practice Judaism.

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Charging Fraud Without Sufficient Evidence Is Fatal to the Charge

Inadequate Evidence Requires Fraud Charges to be Dismissed

I wrote an article at http://zalma.com/blog/its-sinful-to-defraud-church-mutual/ that I called “It’s Sinful to defraud Church Mutual” where, in my digest of the case where I opined:

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

If the lawyers and adjusters had – as Church Mutual alleged – committed fraud my opinion was correct. Church Mutual, however, was unable to prove what it alleged against the defendants. Church Mutual appealed its loss and has now lost again at the Third Circuit Court of Appeal now available as a non precedential case.

My opinion that attempts at fraud should be fought vigorously remains the same but that, before doing so it must have evidence sufficient to prove the case. When the evidence is not there it is counter-productive to assert fraud and a waste of legal and court time.

Attorney Joseph Zenstein wrote to me and provided a copy of the decision of the Third Circuit stating:

The reason I am sending the opinions to you is because I would hope that by writing your article that you would be interested in the outcome of the case.  I also believe when someone is writing an article and placing it online for all the world to see, it is important to get the other side of the story before assigning guilt and condemnation.  Further, I do not believe in making assumptions that a church and an insurance company were defrauded and demonizing public adjusters and lawyers, without knowledge of all the facts.

It was not my intent to assume anything, especially that public adjusters and attorneys were fraudsters. If the evidence existed the perpetrators should be punished. If not, the lawyers who brought the case should be concerned that they did not well serve their client by not presenting sufficient evidence to prove their allegations.

As Mr. Zenstein pointed out to me asking that I review the Third Circuit’s decision:

I understand your article was based on the facts as set forth in the Complaint drafted by the insurance company’s attorney, but most of the facts were wrong, including the allegation that the church was an unwitting participant in presenting its claims and that it had no idea of the claims being presented on its behalf.  Some critical facts that the insurance company chose to ignore and misrepresent in its complaint (that you relied upon) was that the church and its personal legal counsel, directly hired my firm, signed a written fee agreement with my firm, reviewed and verified both complaints in the underlying actions prior to filing, and provided written direction to my firm to file them.  Up until the church retaining my firm, we had no involvement with the underlying claims.  Ultimately, the insurance company could not produce one single fact that the lawyer defendants committed fraud or conspired to commit fraud.  For these reasons and many others, the insurance company’s case against my firm, myself and another lawyer here, was doomed from the start.

When I digest cases I rely on the facts alleged and reported in the opinion. I had no intention to misrepresent anything.

The Third Circuit concluded:

Church Mutual had alleged that the defendants “acted in concert with the common purpose of submitting fraudulent claims.” (App. 88 ¶ 137.) Church Mutual also asserted that the defendants “acted maliciously with the intent of injuring” the company. (App. 89 ¶ 139.) As the District Court noted, the evidence upon which Church Mutual primarily relied was the close business relationships between the defendants. The defendants served as referral sources and worked together on prior unrelated insurance actions. The lawyers were also previously tenants of the adjusters and the lawyers and adjusters employed the same people at different times. Finally, the parties were financially intertwined, with payments exchanged informally on a case by case basis.

We agree with the District Court, however, that, in the absence of other evidence of concerted action and malice, summary judgment was appropriate. Accordingly, we will affirm the District Court’s summary judgment ruling on the civil conspiracy claim.

Clearly, a mere association of the parties working in the same area is not sufficient to support a case for fraud.

I thank attorney Zenstein for allowing me to report on the final decision and the reason for the loss – a lack of evidence.

ZALMA OPINION

As I have said in various publications it is inappropriate to accuse a person of fraud without first obtaining sufficient evidence to prove beyond a preponderance that the person accused committed fraud.

 

ZALMA-INS-CONSULT © 2017 – Barry Zalma

This article and all of the blog posts on this site digests and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, 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 practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business. Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

Check in on Zalma’s Insurance 101 – a Videoblog – that allows your people to learn about insurance in three to four minute increments at http://www.zalma.com/videoblog

Look to National Underwriter Company for the new Zalma Insurance Claims Library, at www.nationalunderwriter.com/ZalmaLibrary  The new books are Insurance Law, Mold Claims Coverage Guide, Construction Defects Coverage Guide and Insurance Claims: A Comprehensive Guide The American Bar Association, Tort & Insurance Practice Section has published Mr. Zalma’s book “The Insurance Fraud Deskbook” available at  http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=214624, or 800-285-2221 which is presently available and “Diminution of Value Damages” available at http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=203226972 Mr. Zalma’s three new e-books  were recently added and are available at http://www.zalma.com/zalmabooks.html

Mr. Zalma’s reports can be found on Tumbler at https://www.tumblr.com/search/zalma,  on Facebook at https://www.facebook.com/barry.zalma and you can follow him on Twitter at https://twitter.com/bzalma

Legal Disclaimer:

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

 

 

 

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