Zalma’s Insurance Fraud Letter – October 15, 2021

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Zalma’s Insurance Fraud Letter Volume 25, Number 20

Read the full text of ZIFL at https://www.linkedin.com/pulse/zalmas-insurance-fraud-letter-barry-zalma-esq-cfe-6854754059379990528 and at https://zalma.com/blog and see the video at https://youtu.be/mwtG3NGeOvw and at https://rumble.com/vnqr76-zalmas-insurance-fraud-letter-october-15-2021.html,

Criminal Caused Suit on Policy to Drag on for More than Six Years

Court Finally Stopped an Unconscionable Level of Overlitigation

United States District Judge Gary R. Brown was faced with a legal dispute that, perhaps because the defendant was a criminal, went on for years without a final disposition. In Principal Life Insurance Company v. Jason P. Brand, No. CV 15-CV-3804, United States District Court, E.D. New York (September 29, 2021) the case was reduced to seven years on disputes that appeared to be relatively straightforward:

  1. defendant Brand obtained a disability policy in early 2012 from plaintiff Principal Life, after being less than forthcoming about his health history.
  2. In June 2014 – prior to the submission of Defendant’s disability claim on November 14, 2014 – the New York State Attorney General’s office raided Defendant’s offices, seizing his computers and physical files, leading to indictment on October 16, 2014 of Defendant and his businesses, DASO Development Corp. and Narco Freedom, Inc., for insurance fraud in the first degree and grand larceny in the second degree, charges to which defendant would plead guilty.
  3. Defendant filed a disability claim based upon anxiety;
  4. Principal Life, for its part, acted quickly and rescinded the policy and
  5. Filed a declaratory relief action.

Proactive Insurer Has to Fight to Renew Judgment Against Convicted Fraudster

Insurer’s $7,870,557.89 Judgment Against Fraudster Stands

Insurer May Collect on Default Judgment Against Fraudster

In People of The State of California, ex rel. Interinsurance Exchange of The Automobile Club of Southern California v. Alex Semyon Mirsky, B297321, California Court of Appeals, Second District, Seventh Division (September 21, 2021) Alex Semyon Mirsky appealed from the superior court’s denial of a motion to vacate a 2013 renewal of a default judgment and the underlying default judgment.

In 2003 the superior court entered a default judgment of over $7.8 million against Mirsky. Interinsurance Exchange of the Automobile Club of Southern California (Interinsurance Exchange) renewed the judgment in 2013, and in 2018 it mailed notice of the renewal to Mirsky at an address Interinsurance Exchange claimed was Mirsky’s last known address. Mirsky filed a motion to vacate the renewal of judgment, or, in the alterative, vacate the default judgment under Code of Civil Procedure section 473, subdivision (d). The trial court denied the motion, concluding Mirsky’s motion to vacate the renewal of judgment was untimely and Mirsky failed to meet his burden to show the default judgment was void.

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Other Insurance Fraud Convictions


© 2021 – Barry Zalma

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 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Contract Interpretation and the World Trade Center

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A Video Explaining the Doctrine of Reasonable Expectations

See the full video at https://youtu.be/BvhlHaxVjPU and at https://rumble.com/vnp1le-contract-interpretation-and-the-world-trade-center.html

The act of infamy at the World Trade Center (WTC) in New York City on September 11, 2001, is responsible for a great deal of insurance litigation concerning, among other things, the meaning of the term “occurrence” in first party property policies and the methodology required of insurers when interpreting a policy of insurance. In the WTC policies, “occurrence” was defined as follows:

“Occurrence” shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes. All such losses will be added together and the total amount of such losses will be treated as one occurrence irrespective of the period of time or area over which such losses occur.

Because WTC insurance issues are surrounded by the horrendous facts of the attack, and due to the fact that some policies had yet to be printed and delivered to the insured before September 11, 2001, the decisions rendered in interpreting the policies had far-reaching impact. The rulings in the WTC cases, combined with a decision of the California Supreme Court, are changing how insurance policies are interpreted. Since policy interpretation is essential to the presentation of any insurance claim, the following detailed discussion is important to all those concerned with insurance claims.

“Reasonable expectations” does not mean, however, that the expectations of the insured can change or modify the clear and unambiguous language of the policy of insurance. The Third Circuit found, in Canal Insurance v. Underwriters, against the insured’s claim of reasonable expectations, finding that in the context of the case before it “the refusal to look beyond the plain meaning of the unambiguous exclusionary language to Singh’s reasonable expectations is consistent with the interpretation of Pennsylvania case law in our Circuit.”

For example, a case decided over 200 years ago made the point that the reasonable expectations of the insured include the understanding that “every [insurer] is presumed to be acquainted with the practice of the trade he insures…. If he does not know it, he ought to inform himself.” Similarly, more than 150 years ago the US Supreme Court in Hazard’s Administrator v. New England Marine Insurance Co., 33 U.S. 557 (1834) adopted the rule. It concluded that “no injustice is done if insurers are presumed to know their insureds’ industry because it is part of their ordinary business.”


© 2021 – Barry Zalma

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 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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A Thorough Investigation Can Be Completed in a Short Time

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Clear & Unambiguous Exclusion Must be Enforced

After claiming that on or about July 25, 2019 Ms. Levine noticed significant structural damage to one of the walls in her house’s basement and more specifically, that the wall was swelling, cracked, and bowing inward she filed a claim with State Farm. After the claim was denied the insurer was sued in Linda Levine and Susan Liebeler v. State Farm Fire And Casualty Company, Civil Action No. 20-1108, United States District Court, W.D. Pennsylvania (September 30, 2021). State Farm moved to dismiss.

BACKGROUND

On or about July 25, 2019, Plaintiffs Linda Levine (“Ms. Levine”) and Susan Liebeler (“Ms. Liebeler”) were joint owners of a home located at 147 Shannon Drive in New Castle, Lawrence County, Pennsylvania (“the Shannon House”). Ms. Levine resided in the Shannon House on a full-time basis at the time of the events described in the Amended Complaint, and Ms. Liebeler is a resident of California.

The Shannon House’s basement is described as being “partially below the ground with four foundation walls,” with each foundation wall extending “between five and twelve inches above the surface of the ground,” and with “the portion of each foundation wall extending above the surface of the ground (including the wall that Ms. Levine observed to be bowing inward on July 25, 2019)” being “exposed to the elements on the exterior side.”

The plaintiffs were insured against the risks of loss not excluded of the Shannon House on July 25, 2019 “under a policy and/or contract of homeowners insurance issued by” Defendant State Farm “to and for the benefit of Plaintiffs, (the “Policy”). That same day, Ms. Levine reported the damage to the foundation wall to State Farm and initiated a formal claim under the Policy.

State Farm claim specialist David C. Smilek (“Mr. Smilek”) visited the Shannon House and Ms. Levine in response to her claim. The Amended Complaint alleges that Mr. Smilek spent no more than 20 to 30 minutes at the Shannon House, and no more than ten minutes observing and examining the house, during which time he did not conduct testing or take measurements. At the end of his visit, “Mr. Smilek told Ms. Levine that the Homeowners Policy did not cover the damages to the Shannon House,” and the following day, July 27, 2019, State Farm issued a formal letter addressed to Ms. Levine and signed by Mr. Smilek (the “denial letter”) in which State Farm denied any and all coverage under the Policy for the losses described in her claim.

Plaintiffs further aver that at or about the same time they initiated their claim with State Farm, they also initiated a mine subsidence claim under an insuring agreement issued by the Pennsylvania Department of Environmental Protection (“PA DEP”). According to the Amended Complaint, a PA DEP engineer conducted an investigation at the Shannon House the day before Mr. Smilek’s visit and later provided Plaintiffs with a report indicating that, while the damage to the Shannon House was not caused by a sinkhole or mine subsidence, several other causes for the damage were possible, including causes covered under the Policy.

LEGAL ANALYSIS

Count I: Breach of Contract

The District Court concluded that Plaintiffs failed to allege losses that are covered under the plain language of that Policy.

In SECTION I (“YOUR PROPERTY”) of the Policy at issue here, the LOSSES NOT INSURED sub-section provides as follows: “1. We do not insure for any loss to the property described in Coverage A [(the Dwelling)] which consists of, or is directly and immediately caused by, one or more of the perils listed in items a. through n. below, regardless of whether the loss occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these: … c. freezing, thawing, pressure or weight of water or ice, whether driven by wind or not, to a swimming pool, hot tub or spa, including their filtration and circulation systems, fence, pavement, patio, foundation, retaining wall, bulkhead, pier, wharf or dock;   l. settling, cracking, shrinking, bulging, or expansion of pavements, patios, foundation, walls, floors, roofs or ceilings . . . .”

The District Court found that the claimed losses related to the damaged basement foundation wall – allegedly caused by water striking the outer foundation wall above the ground during periods of excess rainfall – are clearly excluded from coverage. First, Plaintiffs’ alleged losses related to the damaged foundation wall, as described in the Amended Complaint, clearly occurred as a result of “freezing, thawing, pressure or weight of water or ice . . . to a . . . foundation, ” as set forth in Item 1.c.

Courts Should Never Torture the Language of a Policy to Find Coverage

Upon review of the plain language of the exclusion it is clear that the Policy does not cover Plaintiff’s alleged losses. State Farm also argued that Plaintiffs’ alleged losses are excluded and the Court did not see a material difference in the plain meaning of the exclusion. Furthermore, given the clear, simple language of the Policy, and because straightforward policy language should be given its natural meaning. The District Court found that it would be inappropriate to torture such language to create an ambiguity in order to construe coverage for Plaintiffs here.

Plaintiffs also failed to plead losses that are covered under the plain language of the Policy and, accordingly, that they have failed to state a plausible breach of contract claim under Pennsylvania law.

Count II: Bad Faith – Insufficient Allegations of Inadequate Investigation

Count II of the Amended Complaint alleges that the acts and omissions of State Farm in the handling and denial of Plaintiffs’ insurance claim violated 42 Pa. C.S. § 8371 and constitute statutory bad faith. Pennsylvania’s statute regarding bad faith insurance practices provides that:

To recover in a bad faith action, the plaintiff must present clear and convincing evidence (1) that the insurer did not have a reasonable basis for denying benefits under the policy and (2) that the insurer knew of or recklessly disregarded its lack of a reasonable basis.

Additionally, a bad faith claim is generally an independent cause of action separate from the contract claim. Thus, resolution of a coverage claim on the merits in favor of the insurer requires dismissal of a bad faith claim premised on the denial of coverage, because under the circumstances the insurer necessarily has a reasonable basis for denying benefits. However, if bad faith is asserted as to conduct beyond a denial of coverage, the bad faith claim is actionable as to that conduct regardless of whether the contract claim survives.

Therefore, to the extent that Plaintiffs’ bad faith claim is based on State Farm’s denial of coverage under the Policy, the dismissal of Count I for the reasons discussed requires the dismissal of Count II as well. To the extent that Plaintiffs’ bad faith claim is based on State Farm’s alleged failure to conduct an adequate investigation, Plaintiffs simply do not assert sufficient factual allegations in their Amended Complaint to support such a cognizable bad faith claim.

Although the duration of an adjuster’s inspection might be relevant to a claim of bad faith, it does not itself demonstrate bad faith. Thus, even accepting the cited allegations as true, Plaintiffs have not pled sufficient facts in their Amended Complaint to support a cognizable claim of bad faith for State Farm’s failure to conduct an adequate investigation.

Plaintiffs’ Amended Complaint in its entirety was dismissed without prejudice to amendment with sufficient facts to state a claim.

ZALMA OPINION

Although it was clear to the court that the denial of the claim was proper, even if the investigation lasted only thirty minutes, there was no claim of a loss not excluded and no evidence to even indicate bad faith conduct. Regardless, the court allowed the Plaintiffs a third attempt to state a cause of action that asserts facts sufficient to overcome the clear and unambiguous exclusions or allege acts that would support a claim that State Farm committed the tort of bad faith.


© 2021 – Barry Zalma

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 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Rules of Contract Interpretation

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A Video Explaining the Interpretation of Insurance Contracts

See the full video at https://youtu.be/TktjMrIBaOc  and at https://rumble.com/vnnb6q-a-video-explaining-the-interpretation-of-insurance-contracts.html

The following rules govern the construction of contracts of insurance:

If the terms of a promise are in any respect ambiguous or uncertain, it must be interpreted in the sense in which the promisor believed at the time of making it, that the promisee understood it. [California Civil Code § 1649] (which provides an excellent definition of the basic rule of interpretation followed in most states).

“If a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous.”

However, if “the language of a policy or contract is subject to two or more reasonable interpretations, it is ambiguous.” Simply stated, all contracts are interpreted equally except insurance contracts, which are interpreted to favor the insured in the event of an ambiguity.

An insurer may not rely on an ambiguous interpretation of a policy provision that, if construed as the insurer contends, would deprive the insured of coverage.

When the language of an insurance contract is reasonably susceptible to two constructions, it should be construed in favor of the insured.

It is not necessary to show that the construction against the insurer is more logical than that against the insured; it is sufficient to show that the construction in favor of the insured is equally reasonable with that which favors the insurer.


© 2021 – Barry Zalma

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 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Hold Harmless and Indemnity Agreements Enforceable

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Insurer Entitled to Step in Shoes of Insured and Recover More than Three Million Dollars in Fees Paid to Defend Insured

In Sentinel Insurance Company, Ltd. v. VLM Foods, Inc., et al., No. 1:19-cv-1395(LMB/TCB), United States District Court, E.D. Virginia, Alexandria Division (October 1, 2021 Sentinel Insurance Company, Ltd. (“plaintiff or “Sentinel”) defended its insured TSC in more than 25 lawsuits arising out of the hepatitis A virus (HAV) outbreak and in paying some settlements. Sentinel seeks express indemnification for those fees, costs, and payments from defendants VLM Foods, Inc. (“defendant” or “VLM”), a Canadian entity, and Patagonia Foods, LLC (“defendant” or “Patagonia”), a Californian entity. Both entities were upstream links in a frozen strawberry distribution chain that carried HAV.

BACKGROUND

In this action, Sentinel “seeks to prosecute [TSC’s] right[s]” of recovery against VLM and Patagonia. Sentinel seeks recovery under a theory of “Express Indemnity,” based on its insurance policy covering TSC and three agreements: the VLM-Patagonia agreement, the Patagonia-Sysco agreement, and the Patagonia-ITI agreement.

Sentinel Insurance Policy

Condition 8(a) of the Policy, titled Transfer of Rights of Recovery, provided: “If the insured has rights to recover all or part of any payment, including Supplementary Payments, we have made under this Coverage Part, those rights are transferred to us. The insured must do nothing after loss to impair them. At our request, the insured will bring ‘suit’ or transfer those rights to us and help us enforce them….”

Sentinel stands in the shoes of TSC for purposes of this lawsuit, in which Sentinel now seeks to recover $3,548,292.90, comprised of $3,342,989.41 in attorney’s fees it incurred in defending TSC against the underlying HAV claims, $187,636.82 in associated litigation expenses, and $17,666.67 it paid to resolve three underlying HAV claims, as well as prejudgment interest on these amounts. Although VLM opposed the damage amount in its motion for summary judgment as to Sentinel’s complaint, during oral argument it admitted that it was not contesting the amount.  Patagonia has not contested the amount.

Distribution Chain

TSC is a nationwide franchisor of cafes specializing in smoothies. TSC created the supply and distribution chain for the frozen strawberries at issue in this civil action. TSC franchise agreements and documents require TSC franchisees to purchase frozen fruit in accordance with the guidelines, specifications, and approved supplier, distributor, and vendor lists issued by TSC.

Patagonia acts as a wholesale seller of frozen produce, including frozen strawberries. Since 2006, Patagonia has sourced roughly 100 million pounds of frozen fruits, including strawberries, for TSC, which is equivalent to roughly $100 million of business. Although during the period at issue there was no formal written agreement between them, Patagonia and TSC regularly communicated, negotiated, and reached agreements regarding food product specifications and details, quality control issues, their business relationship, the policies and procedures that applied to that relationship, TSC’s supply chain and distribution needs, Patagonia’s ability to fulfill those needs, projections of TSC’s annual use of frozen fruits, frozen fruit pricing, TSC’s marketing efforts, potential new menu items for TSC to provide its franchisees, and the general state of the frozen fruit industry. Patagonia does not have these types of business communications with TSC franchisees.

In 2015, TSC and Patagonia entered into a written bulk purchasing arrangement for frozen strawberries under which Patagonia agreed to supply a particular type of strawberry for use in TSC’s franchises, which included the frozen strawberries at issue in this civil action. To fulfill this arrangement, on September 14, 2015, Patagonia sent VLM-a global frozen food vendor, processor, and distributor based in Canada-a purchase order for 60 loads of individually quick-frozen strawberries from Egypt. That same day, VLM sent Patagonia an executed sales confirmation for the 60 loads (3.168 million pounds) of frozen strawberries.

HAV Outbreak

In the late summer and early fall of 2016, several state health agencies, the Centers for Disease Control and Prevention (“CDC”), and the U.S. Food & Drug Administration (“FDA”) (collectively, “public health officials”) identified and investigated an HAV outbreak. Public health officials identified 129 individuals-54 of whom were hospitalized-who acquired HAV infections as a result of consuming smoothies or other food items purchased from certain TSC locations that were made from or exposed to frozen strawberries. No deaths were identified. The FDA tested 19 samples of strawberries, six of which originated from ICAPP and tested positive for HAV. The FDA’s trace-back investigation concluded that the frozen strawberries served at the implicated TSC franchisees originated from ICAPP. In October 2016, ICAPP voluntarily recalled frozen strawberries imported into the United States starting January 1, 2016.

As a result of this HAV outbreak, dozens of state court lawsuits and two federal class actions were filed, and over 200 claims were asserted against TSC and various TSC franchisees.

Hold Harmless Agreements

Patagonia had three agreements relevant to the issues in this civil action. First, it had a Hold Harmless Agreement and Guarantee/Warrantee of Product (“VLM-Patagonia agreement”) with VLM, which was signed by VLM at its headquarters in Canada and sent to Patagonia in relation to Patagonia’s purchase of pineapple from VLM’s La Paz production facility in Costa Rica. The VLM-Patagonia agreement provided, in part to guarantee that the strawberries were not adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act (the “Act”) and (b) to not be an article which cannot be introduced into interstate commerce.

The seller also agreed to defend, indemnify and hold harmless Buyer and its employees, representatives, directors and customers (Individually an “Indemnitee”) from all actions, suits, claims, demands and proceedings, (“Claims”), and any judgments, damages, losses, debts, liabilities, penalties, fines, costs and expenses (including reasonable attorney’s fees), resulting therefrom whether arising out of contract, tort, strict liability, misrepresentation, violation of applicable law and/or any cause whatsoever.

DISCUSSION

VLM’s Liability to Sentinel

Under the VLM-Patagonia agreement, VLM guaranteed the quality of goods it sold to Patagonia and agreed to indemnify Patagonia (the buyer). Under these facts, no reasonable jury could find that TSC was not a customer of Patagonia under either party’s proffered definition. Patagonia considered TSC its “customer,” and therefore VLM must indemnify TSC according to the terms of the VLM-Patagonia agreement.

The VLM-Patagonia agreement applies to the frozen strawberries shipped to Patagonia by VLM, and under that agreement VLM is required to indemnify TSC, which the Court finds is a customer of Patagonia.

Patagonia’s Liability to Sentinel

Patagonia’s liability to Sentinel is governed by the Patagonia-Sysco and Patagonia-ITI agreements. Using essentially the same language as the VLM Agreement, the Patagonia-Sysco agreement contains a promise by Patagonia to indemnify and defend Sysco and its “customers” from claims and suits “alleged to have arisen out of (a) the delivery, sale, resale, labeling, use or consumption of any Product,” and like the VLM Agreement, this one is also signed only by the party against whom the hold harmless obligations are to be enforced, in this case, Patagonia.

Whether Sentinel Can Recover Under the Voluntary Payment Doctrine

The voluntary payment doctrine, as established under Virginia common law, provides that where a party pays an illegal demand with full knowledge of all the facts which render such demand illegal such payment must be deemed voluntary, and cannot be recovered back. However, since Sentinel was obligated under the insurance policy to defend TSC against the HAV claims, the voluntary payment doctrine did not bar Sentinel’s recovery in this litigation.

Liability Between Patagonia and VLM

The court concluded that Patagonia and VLM are jointly and severally liable to Sentinel, standing in place of TSC, for the costs and fees it has incurred in the HAV litigation and in this litigation. Moreover, under the VLM-Patagonia agreement, VLM must indemnify Patagonia for Patagonia’s liability to Sentinel, as well as its litigation costs. For these reasons, Patagonia prevails on its crossclaim against VLM for indemnification of any damages it has incurred in connection with the litigation concerning the HAV lawsuits, as well as its attorney’s fees and costs incurred in this litigation, if those fees and costs are sought.

CONCLUSION

Sentinel’s summary judgment motion against Patagonia and VLM was granted, and Patagonia’s and VLM’s cross-motions for summary judgment against Sentinel were denied. As a result, VLM and Patagonia are jointly and severally liable to Sentinel in the amount of $3,548,292.90, plus pre-judgment interest.

Patagonia’s summary judgment motion against VLM was granted, and VLM’s cross-motion for summary judgment on Patagonia’s crossclaim was denied. As a result, VLM must indemnify Patagonia for Patagonia’s liability to Sentinel, and if Patagonia seeks reimbursement for its attorney’s fees and costs incurred in this litigation, VLM will be liable for those fees and costs to the extent they are found to be reasonable.

ZALMA OPINION

This case teaches the importance of hold harmless and indemnity agreement in commercial transactions. The insurer, Sentinel, was required to defend its insured and then, properly sought reimbursement of the attorney fees it paid to defend its insured from the suppliers who agreed to hold harmless and indemnify its insured. Every liability claim investigation requires a determination of the existence of such contract and, if they are there, the insurer should obtain the indemnity that its insured would have obtained if it had no insurance.


© 2021 – Barry Zalma

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 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Number of Occurrences

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A Video Explaining What to Do When a Claim Includes Multiple Occurrences

See the full video at https://youtu.be/S-gMSLPyp3k  and at https://rumble.com/vnllfy-a-video-explaining-what-to-do-when-a-claim-includes-multiple-occurrences.html

CGL policies are written with endorsements that make the number of occurrences highly important, especially in continuing loss cases. deductibles or self-insured retentions are charged based on the number of occurrences or the number of claims. policy limits can apply individually per occurrence, individually per loss, individually per claim, or in the aggregate over a one year period. The test applied is usually objective. [Uniroyal, Inc. v. Home Insurance Company, 707 F. Supp. 1368 (1988); Champion International Corporation v. Continental Casualty Company, 546 F. 2d 502 (1976), Cargill, Inc. v. Liberty Mutual Insurance Company, 488 F. Supp. 49 (1979) Affirmed 621 F. 2d 275 (1980); Mason v. Home Insurance Company, 177 Ill. App. 3d 454, 532 N.E. 2d 526 (1988); 64 A.L.R. 4th 688.]

A triggering injury in fact for an underlying claim may be found as early as the time of first exposure to asbestos or silica, and may continue progressively through the claimant’s death or the date of filing the claim, whichever occurs earlier. [Danaher Corp. v. Travelers Indem. Co., 414 F.Supp.3d 436 (S.D. N.Y. 2019)]

In Lombard v. Sewerage and Water Board of New Orleans, 284 So.2d 905 (La.1973) and its progeny, the courts in exposure cases have applied the “effect” test as opposed to the “cause” test in determining the number of [Thebault V. American Home, 2015-0800 (La. App. 4Cir. 4/20/16), 195 So. 3d 113.]

A common method of allocation is referred to as the “time on the risk” method, whereby each insurer is responsible for the pro rata percentage of time the insurer’s policy was in effect over the course of the full time period over which loss was sustained by the insured. For example, Edison Co. Of New York, Inc. v. Allstate Ins. Co., 774 N.E.2d 687, 695 (N.Y. 2002)] affirmed the trial court allocation of loss through “time-on-the-risk” method, while “not foreclos[ing] pro rata allocation among insurers by other methods.”

 


© 2021 – Barry Zalma

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 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Construction Contract Controls Over “Other Insurance” Clause

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Insurer Must Defend and Indemnify Insured Because of Indemnity Agreement in Construction Contract

The Metropolitan Transit Authority and Long Island Railroad (collectively, “LIRR”), and Admiral Insurance Company (“Admiral”), appeal from the March 3, 2020 judgment of the United States District Court for the Southern District of New York (Furman, J.), granting declaratory judgment in favor of Century Surety Company (“Century Surety”) based upon its January 29, 2019 Memorandum Opinion and Order. In Century Surety Company v. Metropolitan Transit Authority, Long Island Railroad, Admiral Insurance Company, Rukh Enterprises, Inc., Marcelo DeJesus, No. 20-1474-cv, United States Court of Appeals, Second Circuit (October 5, 2021) the insurer’s claim that it was excess ignored the indemnity agreement signed by its insured.

FACTS

On April 8, 2013, LIRR contracted with general contractor Defendant Rukh Enterprises, Inc. (“Rukh”) to complete a railroad bridge lead paint removal and repainting project on Metropolitan Transit Authority property-the Cypress Bridge in Queens, NY (the “trade contract”). To execute this project, Rukh hired a non-party subcontractor, East Coast Painting & Maintenance (“East Coast”), to complete certain lead-related work on the project because Rukh was not certified to perform lead-related activities. This project implicated not only the underlying trade contract, but four insurance policies.

On September 13, 2013, an employee of subcontractor East Coast suffered an injury while working on the Cyprus Bridge project, prompting the East Coast employee to sue Rukh and LIRR in New York State court alleging negligence. Rukh, East Coast, and LIRR eventually reached a settlement on December 16, 2019, for which three of the four implicated insurance companies- Admiral (for LIRR), Arch (for Rukh), and Harleysville (for East Coast)-agreed to pay into the settlement amount. Century Surety did not contribute to the settlement and disclaimed all coverage.

On January 27, 2017, Century Surety sued Rukh (its insured), Marcelo DeJesus (the injured employee in the underlying state court action), and LIRR, seeking a declaratory judgment that it had no duty to defend or indemnify any party in the state court action. On April 4, 2017, Admiral sued Century Surety, also seeking a declaratory judgment that Century Surety was obligated to defend and indemnify Admiral’s insured, LIRR, and that the policy limits in Century Surety’s excess policy would have to be exhausted before Admiral’s policy would be implicated. Century Surety moved for summary judgment against Rukh, LIRR, Admiral, and Marcelo DeJesus (who was ultimately dismissed as a party in the district court action for failure to serve). LIRR, Admiral, and Rukh cross-moved for summary judgment.

The district court granted summary judgment in part in favor of Century Surety. The district court concluded that based upon the language contained in the “Other Insurance” provision in the Century Surety policy, that policy was a “true excess policy” that was not liable to tender payment until the other available insurance policies, including the Admiral policy, had tendered payments pursuant to their policy limits. The district court “granted[] [Century Surety] a declaratory judgment that it is not obligated to provide insurance coverage for the Underlying Action” and closed the case.

ANALYSIS

As a threshold matter, Century Surety argued on appeal that the district court correctly concluded that the “Other Insurance” provision in the Century Surety policy qualifies that policy as a “true excess policy,” such that Century Surety is not liable to tender payment until all other applicable insurance policies, including the Admiral policy, are exhausted. Appellants, however, do not dispute Century Surety’s contention that the Century Surety policy is a “true excess policy.” Instead, appellants argue that the district court erred in failing to recognize the legal effect of the indemnity agreement in the underlying trade contract between Rukh and LIRR, under which Rukh agreed to indemnify LIRR for liabilities arising out of the Cyprus Bridge project. According to appellants, regardless of whether the Century Surety policy is a “true excess policy,” the indemnity agreement between Rukh and LIRR controlled and Century Surety must tender payment and exhaust its policy limits ahead of Admiral.

The principal issue on appeal is which relevant contractual term governs-the indemnity agreement in the underlying trade contract between Rukh and LIRR or the “Other Insurance” provision in the Century Surety policy. On the one hand, if the indemnity agreement controls, then Century Surety must pay into the settlement amount and exhaust its policy limits before Admiral pursuant to Rukh’s obligation to indemnify LIRR. On the other, if the “Other Insurance” provision in the Century Surety policy controls, then Admiral must pay into the settlement amount and exhaust its policy limits before Century Surety because the Century Surety policy would be excess to any other applicable insurance policy, including the Admiral policy.

Specifically, even if the contractor’s insurance was excess to the owner’s insurance, the contractor’s insurance would pay first because the owner’s liability still would pass through to the contractor and its insurers. Based on the most recent decisions of New York State’s Appellate Division, the federal court predicted that the New York Court of Appeals would adopt the holdings that an indemnity agreement in the underlying trade contract between insureds governs over the terms of an insurance policy concerning priority of coverage.

Century Surety nevertheless maintains that New York law requires that the terms of an insurance policy regarding priority of coverage always govern over any underlying indemnity agreement between the insureds. Century Surety, however, failed to point to any New York case that would support Century Surety’s understanding of New York law.

The Second Circuit concluded that New York’s highest court would not require a separate action to enforce the parties’ indemnity agreement, and that the parties’ rights and obligations based upon both the terms of the Century Surety policy and the underlying indemnity agreement should be determined in one action.

Finally, the Second Circuit concluded that under New York law, Century Surety, as Rukh’s insurer, is liable to pay into the underlying settlement and exhaust its policy limits before Admiral, LIRR’s insurer.

The Second Circuit reached its conclusion notwithstanding the “Other Insurance” provision in the Century Surety policy that purports to qualify the policy as a “true excess policy” because the indemnity agreement in the underlying trade contract between Rukh and LIRR governs the resolution of this case. Accordingly, the district court erred in granting a declaratory judgment that Century Surety is not obligated to provide insurance coverage for the underlying action. The judgment of the district court was reversed and remanded for further proceedings consistent with its order.

ZALMA OPINION

Other insurance clauses are important contractual terms to allow multiple insurers to decide which insurer is obligated to defend and indemnify the insured and in what order. In this case Century Surety claimed that its “other insurance” clause controlled making it excess to all other insurers while the other insurers, and the Second Circuit, found that the construction contracts’ indemnity agreement controlled before the other insurance clauses came into effect. In the Second Circuit it is important to have insurance and indemnity agreements in every construction contract to control the risk transfer.


© 2021 – Barry Zalma

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 54 years in the insurance business.

Subscribe to Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Insurance Underwriting

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A Video Explaining the Nature of Insurance Underwriting

See the full video at https://rumble.com/vnhcno-insurance-underwriting.html and https://youtu.be/8Gp6WT990IY

Before the insurance claims adjuster begins a claims investigation he or she must understand the nature of underwriting because it is how an insurance policy comes into existence.

Underwriting is defined as the process of accepting or rejecting risks. It requires a determination by the underwriter of the risks for which insurance is sought and the terms under which the insurance will be written if the risk is acceptable. Underwriting insurance is a function unique to the insurance industry which transfers the risk of loss from the person or entity insured to the insurer.

Three centuries ago, insurance originally was a very personal matter. A property owner would discuss with an individual insurer the problems, values and risks of loss involved in a commercial enterprise. They would then agree upon the terms under which the insurer would insure the risk. Together they would draft a contract and the insurer would sign his name at the bottom — he literally underwrote the insurance.

When the Lloyd’s insurance marketplace started in Edward Lloyd’s coffee shop policies were often written in chalk on a blackboard and those who wished to join in the insurance would sign their name and the percentage they wished to take of the risk under the terms of the policy written on the board.

In its original usage, underwriting referred to the operation of the insurance business. Today, in application, there is a more restricted meaning applied to the term.

Underwriting, in modern usage, is a systematic technique for evaluating risks that are offered to an insurer by prospective insureds. The function of underwriting involves evaluating, selecting, classifying, and rating each risk. Underwriting establishes the standards of coverage and amount of protection to be offered to each acceptable risk. It formulates and administers the rules and procedures that are used to ensure that predetermined standards are met by underwriters. Underwriters are the risk takers. Adjusters only become involved when the risk becomes a loss and the adjuster is called upon to keep the promises made by the policy created by the underwriter.

In the US underwriting has become more corporate and less individual. Underwriters are now invariably employees of insurance companies and no longer put their personal fortunes at risk.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

 

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Tenth Circuit Makes an Insurance Appraisal a full Arbitration

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Historical Reason for Appraisal Eliminated by Tenth Circuit

Bonbeck Parker, LLC and BonBeck HL, LC (collectively, BonBeck) claimed from Travelers  benefits they claimed were due to hail damage. The Travelers Indemnity Company of America (Travelers) acknowledged that some of the claimed damage to BonBeck’s property was caused by a covered hailstorm but argued that the remaining damage was caused by uncovered events such as wear and tear. BonBeck requested an appraisal to determine how much damage occurred, but Travelers refused this request unless BonBeck agreed that the appraisers would not decide whether the hailstorm in fact caused the disputed damage. When BonBeck rejected this condition, Travelers sued in Bonbeck Parker, LLC; Bonbeck HL, LLC v. The Travelers Indemnity Company Of America, No. 20-1192, United States Court of Appeals, Tenth Circuit (October 1, 2021) seeking a declaratory judgment that the appraisal procedure in BonBeck’s policy does not allow appraisers to decide the causation issue. The district court disagreed, ruling that the relevant policy language allowed appraisers to decide causation. After the appraisal occurred, the district court granted summary judgment to BonBeck on its breach of contract counterclaim, concluding that Travelers breached the policy’s appraisal provision. Travelers appealed..

Background

In June 2012, a hailstorm damaged three buildings owned by BonBeck. BonBeck submitted a claim for the damage under its commercial insurance policy with Travelers (the Policy), which covers hail damage. For each building, BonBeck alleged that the hailstorm damaged the exterior siding, overhang, HVAC, and roof. Travelers acknowledged that some hail damage occurred to all the building components except for the roofs, and it covered this damage with two payments totaling about $ 34,200. But Travelers denied coverage for the roof damage, asserting that it resulted not from the hailstorm but from uncovered events like wear and tear, deterioration, and improper installation.

Faced with this impasse over the roof damage, BonBeck invoked the appraisal provision. This provision allows either party to request an appraisal of certain issues on which they might disagree during the claims process, including “the amount of loss.” Invoking the appraisal provision sends the parties’ dispute to a panel comprised of three appraisers (the Panel, for short). But it did not immediately have that effect when invoked by BonBeck.

Travelers would only agree to BonBeck’s appraisal request under certain conditions that had been applied in similar situations for more than a century. In particular, Travelers insisted that the parties require the Panel to distinguish between disputed and undisputed damages.  Travelers’ proposal would not allow the Panel to decide what caused the roof damage, whatever that amount of loss turned out to be. That is, the Panel could decide how much it would cost to repair the roofs but not what caused the roofs to require repair in the first place.

Travelers sued seeking declarations that (1) the Policy precludes the Panel from determining causation issues and (2) Travelers owed BonBeck nothing more because the remaining damage (meaning the disputed roof damage) was caused by excluded causes of loss.

The district court sided with BonBeck, concluding that the appraisal provision authorizes the Panel to make cause-of-loss determinations. The Panel issued its appraisal award, estimating the total repair cost for BonBeck’s loss from hail damage (excluding depreciation) to be about $216,000. Travelers paid BonBeck the appraisal-award amount, minus the approximately $34,200 it had already paid.

After another summary judgment the district court awarded BonBeck nominal damages ($1) and statutory interest ($36,142.63).

ANALYSIS

The disputed policy provision allows either party to request an appraisal on “the amount of loss,” a phrase with an ordinary meaning in the insurance context that unambiguously encompasses causation disputes. Contrary to Travelers’ view, giving effect to this meaning of the term “amount of loss” aligns both with other related policy language and with the appraisal provision’s purpose of avoiding costly litigation.

Mootness

Importantly, though, the Tenth Circuit concluded that Travelers’ response to BonBeck’s argument about the effect of its payment of the appraisal amount effectively moots its argument for reversal of summary judgment on its declaratory-judgment claim. That is, because Travelers admits it does not seek reimbursement of the appraisal-award payment, any relief the Tenth Circuit could grant on that claim would be illusory. Travelers’ appeal of its claim for declaratory judgment was dismissed as moot.

Merits

Because the Colorado Supreme Court has not addressed the issue Travelers raises, the federal court was required to predict how that court would decide the issue. Travelers contended that, contrary to the district court’s view, the Policy unambiguously precludes the Panel from deciding the cause of loss. The district court based its interpretation on the first sentence, which lists three items on which either party may request an appraisal: the value of the property, the amount of income and expense, or the amount of loss. It determined that the third item, “the amount of loss,” encompasses causation disputes. On appeal, Travelers barely mentions that phrase or the district court’s conclusion about its meaning. Significantly, the various dictionary definitions all include a causation component, each making clear that “loss” refers to damage resulting from a covered event.

Travelers briefs had little to say about the phrase “the amount of loss.” Travelers relied, rather, on common, ordinary parlance, “amount of loss” means the monetary value of property damage, irrespective of insurance coverage or source of damage. [Caribbean I Owners’ Ass’n v. Great Am. Ins. Co. of N.Y., 619 F.Supp.2d 1178, 1187 (S.D. Ala. 2008)].

Travelers focuses on the word “appraiser,” which appears several times throughout the appraisal provision. Travelers argues that the “plain meaning of [this term] and the Policy’s requirements for appraisers reflect an intent to limit the scope of appraisals to monetary determinations, thus precluding causation determinations.”  To the Tenth Circuit:”Neither the word ‘appraiser’ nor the qualifications for appraisers render the unambiguous phrase ‘amount of loss’ ambiguous.”

Travelers also relies on the appraisal provision’s purpose.  The Tenth Circuit refused to consider this argument, however, because the disputed language is unambiguous. And were that not the case, Colorado law would require it to construe any ambiguity against Travelers as the drafter of the Policy. Even so, if considered, the purpose of the appraisal provision only confirms what the text compels. As the district court persuasively reasoned, and as Travelers seems to agree, the appraisal provision’s aim “is to avoid litigation and encourage settlement of the parties’ dispute.” Removing causation from the appraisal process frustrates that purpose by “reserving a plethora of detailed damage assessments for judicial review.”

The Policy’s plain language identifies disputes like this one, over “the amount of loss,” as one of the issues on which the parties may request an appraisal. The disputed policy provision allows either party to request an appraisal on “the amount of loss,” a phrase with an ordinary meaning in the insurance context that unambiguously encompasses causation disputes like the one here. Contrary to Travelers’ view, giving effect to this meaning aligns both with other related policy language and with the appraisal provision’s purpose of avoiding costly litigation.

ZALMA OPINION

In my book, Zalma on Insurance Claims Part 104 Third Edition I note that appraisal, since the inception of the Standard Fire Insurance Policy, has been limited to a determination of the quantum of the loss. Determining causation required either an agreement of the insured and the insurer or a court judgment. By taking the quantum of loss away by appraisal all litigation disputing coverage would be limited to a trial or agreement on the cause of the loss. The Tenth Circuit has eliminated this process and allows appraisers to determine both causation and amount of loss and if the cause is one not excluded the entire dispute is resolved. Appraisal is a special form of limited arbitration, there are significant differences between the powers of an arbitrator and those of an appraiser. An arbitrator’s role is more like that of a judge in a judicial proceeding. In Florida, it is clear that “whether the claim is covered by the policy is a judicial question, not a question for the appraisers.” [Gonzalez v. State Farm, 805 So.2d 814, 2000.FL.0049845 (2000)] The Tenth Circuit should reconsider its conclusion and consider the meaning of the language rather than apply a dictionary definition to resolve an issue of law.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

 

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The Construction Contract

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A Video Explaining the Construction Contract

See the whole video at https://rumble.com/zalma and https://youtu.be/zJNtlKPm7fI

When a construction contract, like every other contract, is unambiguous, the parties’ intent may be determined from the contract alone, and it is the duty of the court—not the jury—to state its meaning.

Construction contracts are governed by the same rules as all other contracts. When a court is called upon to interpret a construction contract its terms are given their ordinary and generally accepted meaning with the court working to give effect to the intent of the parties to the contract unless the contract itself gives special meaning to the contract.

A construction contract should always be written. It should, like all other contracts, set forth in detail the duties and obligations of the parties to the contract. It should communicate the scope of work to be rendered and the extent to which each party is involved in the differing aspects of the project.

Contracts serve as means of documenting the services and assets to be exchanged during the course of a project. The contract is important not only to finalize the deal in the minds of the parties to the construction project, but also to help define the performance of the work and may even determine who bears the tax burden.

A basic construction contract is negotiated by the parties and will be interpreted following the normal rules of contract interpretation.

ZALMA OPINION

The construction contract is the most effective means of avoiding disputes between the owner and the builders involved in the construction project. Whether standardized forms are used or the agreement is written to the specifications of the parties by an experienced construction lawyer, the contract is essential to a successful construction effort.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

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To Involve Other Insurers Insured Must Act Promptly

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Student Driver a Permissive User of State’s Car & is an Insured

Too Little, Too Late

In October 2016, Mary R. Evans was a student driver enrolled in a high school driver’s education course. Driving lessons utilized vehicles provided by the high school and owned by the State. These State-owned vehicles were outfitted with brake pedals for both the student driver and for the driving instructor, who was responsible for the unlicensed student driver’s safety. On October 28, 2016, Evans was operating a vehicle under the supervision of driving instructor, Perkins-Johnson. Evans and Perkins-Johnson were involved in an accident with another car (the “Accident”). At the time of the Accident, Perkins-Johnson was employed by the State as a driver’s education instructor for the Red Clay School District. Perkins-Johnson was injured in the Accident.

In State Of Delaware Insurance Coverage Office v. Diona Perkins-Johnson, Mary R. Evans, and The Travelers Home And Marine Insurance Company, C. A. No. N19C-10-260 MMJ, Superior Court of Delaware (August 19, 2021) the state, after defending the student driver for three years tried to pass the obligation to her parents’ insurer by bringing a declaratory relief action.

The Accident

Delaware law mandates that the State procure insurance for vehicles owned by the State. Vehicles owned by the State are covered by a Pennsylvania Manufacturers Association Insurance Group policy (“PMA Policy”). The State-owned driver’s education vehicle operated by Evans at the time of the Accident was covered under the PMA Policy. Evans was “an Insured” under the PMA Policy.

Perkins-Johnson Received Workers’ Compensation

Perkins-Johnson claimed personal injuries as a result of the Accident. Perkins-Johnson sought and recovered workers’ compensation benefits from the State of Delaware, Perkins-Johnson’s employer.

Perkins-Johnson also obtained PIP benefits from the PMA Policy.

Perkins-Johnson sued seeking tort damages for personal injuries arising out of Evans’ alleged negligence. Evans was the sole defendant.

The State filed an answer on behalf of Evans, asserting defenses to the negligence and damages claims. The State-provided defense counsel responses to written discovery, defended Evans’ deposition, and took the deposition of Perkins-Johnson. Evans’ defense was not provided under any reservation of rights on the part of the State. The State did not specifically reserve the right to deny liability coverage to Evans on the basis of any PMA Policy exclusions.

At some point, the State became aware that Evans was an additional insured on the Travelers Policy at the time of the Accident. The State subsequently took the position that Evans was not insured under the State’s policy. On June 28, 2019, the State tendered Evans’ defense and indemnification in the underlying litigation to Travelers.

Coverage Litigation

On October 30, 2019, the State sued for declaratory judgment action. The State and Evans and Travelers have cross-moved for summary judgment to determine who owed defense and indemnity to Evans.

ANALYSIS

Insurance Contract Interpretation

Delaware, contract interpretation is a determination of law. Delaware adheres to the objective theory of contracts, i.e., a contract’s construction should be that which would be understood by an objective, reasonable third party. Priority is given to the intentions of the parties as reflected in the four corners of the agreement. An interpretation that gives effect to all the terms of an insurance policy is preferable to any interpretation that results in a conclusion that some terms are uselessly repetitive.

Where the language of an insurance policy is “clear and unambiguous,” the parties’ intent is ascertained by giving effect to the plain meaning of the policy’s terms and provisions, without resort to extrinsic evidence.  Under the doctrine of contra preferentum, the language of an insurance policy must be construed against the policy drafter.

The Delaware Code provides that the State must maintain minimum insurance coverage for State-owned vehicles. The plain meaning of the statute is clear and unambiguous.

The Court concluded that the State must, and did, maintain liability insurance coverage for Evans against the tort claims brought by Perkins-Johnson in the underlying litigation. Evans was a permissive user of the State-owned vehicle covered under the State’s PMA Policy. Therefore, Evans is an “Insured.”

PMA Policy Exclusions

The precise narrow issue – whether tort damages are available to an employee who sought workers’ compensation benefits from their State employer, as well as tort recovery from a third-party tortfeasor, who is not an agent of the State but nonetheless an insured under the State’s liability insurance policy as a permissive user of State property – is a matter of first impression in Delaware but not difficult in the facts of the case. The Court, as a result, found that there can be multiple Insureds under the State’s PMA Policy. An Insured under one section of the PMA Policy may be different under another section of the PMA Policy. For example, the State is the named Insured under Part IA of the PMA Policy. Evans is an Insured under Part IV of the liability insurance section, Subsection D2 because she was a permissive user. The State is an Insured for the workers’ compensation claims.

Under PMA Policy Part 1 A, Evans is not simply “an Insured” but essentially “the insured.” Perkins-Johnson brought tort claims solely against Evans, who has liability coverage under the State’s PMA Policy as a permissive user of a covered State-owned vehicle. Evans does not have workers’ compensation coverage under the State’s PMA Policy. The State is not a named defendant in the underlying lawsuit.

Delaware’s workers’ compensation exclusivity doctrine does not apply in this case to preclude the State’s defense and indemnification of Evans in the underlying tort action brought by Perkins-Johnson. While an employee who collects workers’ compensation benefits from their employer cannot then recover from their employer for negligence, Perkins-Johnson brought the underlying tort action against Evans alone. Since the State is not a defendant in the underlying litigation the State has a duty to defend and indemnify Evans in the underlying tort action.

The State accepted defense and did not provide Evans with a reservation of rights letter at the time of filing. In 2019, the State sent Evans a denial of coverage letter, disclaiming its obligation to defend and indemnify Evans in the underlying tort litigation, and citing PMA Policy exclusions and knowledge the State obtained during discovery that Evans was an Insured under the Travelers Policy.

The State had ample opportunity to bring in Travelers sooner. The State was, therefore, estopped from changing its initial coverage position, almost three years after the date of the Accident and over nine months after the underlying tort litigation was commenced.

Defendants’ affirmative defenses of waiver and estoppel prevent the State’s denial of primary liability coverage for Evans under the State’s PMA Policy against Perkins-Johnson’s tort claims in the underlying tort litigation. Evans was covered by the State’s PMA Policy in the underlying tort litigation. Evans is an Insured under the State’s PMA Policy as a permissive user of a State-owned driver’s education vehicle covered under the PMA Policy. None of the PMA Policy exclusions apply to the facts of the case.

The Travelers Policy is secondary insurance available to Evans for damages in excess of the primary bodily personal injury coverage under the PMA Policy. Travelers may in the future participate in Evans’ defense.

The Motions for Summary Judgment by Travelers and Evans were granted.

ZALMA OPINION

This case teaches that where there is a dispute between insurers it is incumbent on the parties to act promptly, fairly and in good faith. The state failed to do so. It provided coverage under its policy to Evans without reservation and defended her for a long time before its slothful investigation found that Travelers might also insure Evans. Too little, too late.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to training available at https://claimschool.com; articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Structural Failures & Construction Defect Litigation

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A Video Explaining Insurance for Construction Defects Regarding Structural Failures

See the full video at  and at https://youtu.be/9892NYGGvSI

Structural integrity failures can involve any of the following:

  • concrete;
  • masonry;
  • carpentry; or
  • foundations.

Defects related to site preparation can be caused by any of the following:

  • building on expansive soil or other defective soils incapable of properly supporting structures;
  • building on contaminated soils;
  • lack of a slab-on-grade foundation when the soils are acidic and can cause the deterioration of concrete; or
  • building on improperly compacted soils, which can cause interior distress to cabinets and countertops, make doors difficult to open and cause structures to settle and cracking in stucco, drywall, plaster interior walls, windows, tile floors, concrete flatwork, slabs, and garage flooring.

In Texas, when a completed home developed problems with a shifting foundation, a suit was filed alleging violations of the Texas Deceptive Trade Practices Act (DTPA) and negligence. On the first day of trial, the plaintiff settled with one defendant and proceeded against another. The District Court granted a directed verdict on the claim that there was a violation of the DTPA with a breach of an implied warranty of good-and-workmanlike performance. Only the plaintiff’s negligence claim was submitted to the jury, which found no negligence on defendant’s part. The district court rendered a take-nothing judgment. [Codner v. Arellano, 40 S.W.3d 666 (Tex.App. Dist.3 2001). See also Parmely v. Hildebrand, S.D. 83, 630 N.W.2d 509 (2001), where the seller was found to have made adequate disclosures about expansive soils at time of sale and was not liable for soil expansion damages.]

The Ninth Circuit, dealing with the right to insurance for damages caused by expansive soil, found that under California law, a latent defect exclusion applies to third party negligence that is discoverable only through subsequent intensive expert investigation. Because there is no evidence that the contractor’s negligence in this case was discoverable, short of an in-depth expert inspection after-the-fact, the Ninth Circuit concluded that State Farm was entitled to summary judgment on its exclusion for latent defects. [Winans v. State Farm Fire and Casualty Co., 968 F.2d 884 (9th Cir. 1992).]


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Mudpie’s Attempt at Class Action for Covid Related Losses Fails

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Even the Much Reversed Ninth Circuit Requires Direct Physical Loss to Recover for Lost Business due to Covid

Mudpie, Inc. sued on behalf of itself and a putative class of all retailers in California that purchased comprehensive business insurance coverage from Travelers Casualty Insurance Company of America that included coverage for business interruption; filed a claim for lost business income following California’s Stay at Home order; and were denied coverage. In Mudpie, Inc. v. Travelers Casualty Insurance Company of America, No. 20-16858, United States Court of Appeals, Ninth Circuit (October 1, 2021) the Ninth Circuit ruled on the effort to gain business interruption coverage for losses due to state shut down orders.

FACTS

Mudpie, Inc. appealed a district court order dismissing its claims against Travelers Casualty Insurance Company of America (Travelers). Mudpie operates a children’s store located in San Francisco that sells clothing, toys, books, and other goods. Mudpie alleged that it purchased a comprehensive commercial liability and property insurance policy from Travelers (the Policy), and made a claim pursuant to the Policy’s “Business Income” and “Extra Expense” coverage in 2020 after state and local authorities in California issued several public health orders in response to the COVID-19 pandemic. Mudpie claimed the orders prevented it from operating its store. Travelers denied the claim because there was no physical loss to the property and its “virus exclusion” applied.

On March 4, 2020, Governor Gavin Newsom declared a state of emergency in California in response to the threat posed by COVID-19. The City and County of San Francisco issued a “Shelter in Place Order” on March 16, 2020. The order required residents to remain at their place of residence unless performing “essential activities.” The Shelter in Place Order also declared that “[a]ll businesses with a facility in the County, except Essential Businesses . . ., are required to cease all activities at facilities located within the County except Minimum Basic Operations.” Failure to comply with San Francisco’s Shelter in Place Order was deemed a misdemeanor punishable by a fine, imprisonment, or both.

Mudpie alleged that it complied with the local and state orders (collectively, the Stay at Home Orders) and as a result, was not able to operate its store after March 16, 2020.

Mudpie presented a claim with Travelers under the Policy. In its letter denying the claim Travelers there was no direct physical loss or damage to property at the described premises and that the Business Income and Extra Expense coverage may not apply to Mudpie’s loss. Travelers further stated that the Policy’s coverage excluded “‘loss or damage caused by or resulting from any virus’ – such as the COVID-19 virus.”

Mudpie sued on behalf of itself and a putative class of others similarly situated.

Travelers moved to dismiss. The district court granted Travelers’ motion. The district court declined to consider Travelers’ argument that the Virus Exclusion barred Mudpie’s recovery. The court dismissed the complaint without prejudice but gave Mudpie leave to amend. Mudpie responded by filing a notice advising “it [would] not be amending its Complaint, as permitted by the Court’s Order.” The court then dismissed the complaint with prejudice, and Mudpie appealed.

ANALYSIS

Travelers promised, by its policy to “pay for direct physical loss of or damage to [Mudpie’s] Covered Property . . . caused by or resulting from a Covered Cause of Loss.”

Under California law, the burden is on the insured to establish that a claimed loss “is within the basic scope of insurance coverage.” The parties disputed whether Mudpie adequately alleged a “direct physical loss of or damage to” property under the Policy, and they offered competing interpretations of that phrase. California courts require that the USCA interpret an insurance policy according to the “clear and explicit” meaning of the terms as used in their “ordinary and popular sense.” [AIU Ins. Co. v. Superior Ct., 799 P.2d 1253, 1264 (Cal. 1990)]

In California “direct physical loss” contemplates an actual change in insured property occasioned by accident or other fortuitous event directly upon the property causing it to become unsatisfactory. In other words, for loss to be covered, there must be a distinct, demonstrable, physical alteration of the property.

Mudpie contends that under California law “direct physical loss of or damage to” property does not require actual damage to the property but merely requires that the property no longer be suitable for its intended purpose.

California courts, in the opinion of the Ninth Circuit, would construe the phrase “physical loss of or damage to” as requiring an insured to allege physical alteration of its property. The overwhelming majority of cases to consider business income claims stemming from COVID-19 with similar policy language hold that direct physical loss or damage to property requires some showing of actual or tangible harm to or intrusion on the property itself.

Therefore, the Ninth Circuit affirmed the district court’s ruling that Mudpie’s claimed losses are not covered by the Policy. In addition the Ninth Circuit left nothing to question by concluding that the Policy’s Virus Exclusion bars coverage for Mudpie’s claimed losses.

California courts broadly interpret the term “resulting from” in insurance contracts. Mosley v. Pac. Specialty Ins. Co., 263 Cal.Rptr.3d 28, 35 (Ct. App. 2020). And where there is a concurrence of different causes, the efficient cause-the one that sets others in motion-is the cause to which the loss is to be attributed, though the other causes may follow it, and operate more immediately in producing the disaster. The California Supreme Court explained in Garvey v. State Farm Fire & Casualty Co., 770 P.2d 704 (Cal. 1989). California courts apply the efficient proximate cause doctrine because the doctrine creates a workable rule of coverage that provides a fair result within the reasonable expectations of both the insured and the insurer.

Mudpie’s complaint does not allege an attenuated causal chain between the virus and Mudpie’s losses. Nor does Mudpie dispute that the Stay at Home Orders that impacted Mudpie’s business were issued in response to the COVID-19 pandemic. Though Mudpie argues it was the government orders that most directly caused its injury, Mudpie does not plausibly allege that “the efficient cause,” i.e., the one that set others in motion, was anything other than the spread of the virus throughout California, or that the virus was merely a remote cause of its losses. Accordingly, the Policy’s Virus Exclusion bars coverage for Mudpie’s claims.

ZALMA OPINION

When even the Ninth Circuit requires actual direct physical loss or damage to pursue a business interruption claim after shut down because the state of California made it a crime to do business, is not a covered cause of loss, many were surprised. Then, it also found that the efficient cause that sets all other causes in motion was the virus and the orders that followed its ability to infect citizens of the state. If any person or entity caused damage to Mudpie and its described class members was not Travelers but the state of California that took the ability to do business from Mudpie who may wish to seek damages under the Fifth Amendment for a taking of its business by the state of California in an effective condemnation of Mudpie’s business.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Misrepresentation on an Insurance Application Cost Insured $760,732.96

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Misrepresenting a Material Fact on an Insurance Policy Allows Insurer to Rescind

Howard “Anthony” Jesmer (Jesmer) appealed the grant of summary judgment against him in this insurance coverage dispute. Jesmer argued that the district court erred in concluding that his answer to a question on an insurance application rendered his policy void under Tennessee law. In Howard Anthony Jesmer v. Erie Insurance Company, No. 21-5186, United States Court of Appeals, Sixth Circuit (September 30, 2021) reviewed what is needed to rescind a policy in Tennessee.

FACTS

On January 30, 2018, Jesmer applied for property insurance to cover “comprehensive perils” to his home in Arlington, Tennessee. As part of the application process, Jesmer and his father, Howard Jesmer (Howard), met with an Erie agent at 310 Fields Drive. Jesmer answered the insurance application’s questions about the property. As Jesmer answered the questions orally, the insurance agent completed the written questionnaire. Jesmer answered “no” to the question “Is Applicant conducting any business or occupational pursuits at the premises?”

The application warned that “[a]n incorrect answer, intentional or not, to any information may jeopardize [Erie’s] acceptance of this application.” Jesmer and the agent signed the completed application. Jesmer “glanced” at the application before signing it.. Erie issued a policy on the property providing coverage for certain residential and property losses from February 1, 2018 to February 1, 2019.

In October 2018, Jesmer filed a timely proof of loss under the insurance policy stating that a “fire of unknown origin [had] completely burned [his] dwelling and all its contents.” Jesmer claimed $760,732.96 in covered losses. Erie denied Jesmer’s claim, and its agent subsequently informed Jesmer’s counsel that the claim had been denied, in part, because at the time the application for insurance was completed, Mr. Jesmer was working in a business owned by his father known as H&M Recycling. That business was being operated from the Insured location which involved keeping tow trucks and vehicles on the premises. After Mr. Jesmer’s father moved from the insured location, Mr. Jesmer continued the business from the premises. Jesmer sued Erie.

It was undisputed that at the time Jesmer signed the insurance application, he was working for his father Howard’s towing company, H&M Auto Recycling (H&M), and had been doing so since approximately the age of seventeen. H&M acquires automobiles and either disassembles them for scrap or fixes them for resale. In approximately 2015, Howard moved the business from its previous location in Mississippi to the Jesmer’s property.

Jesmer testified at deposition that his work for H&M consisted of “picking up vehicles” and driving them wherever directed by his father. H&M paid Jesmer $1, 000 in cash weekly to do this work. Jesmer regularly kept H&M tow trucks at the property for use when dispatched on a call.  Howard, the father, explained that Jesmer’s job was to “run” the business from the property, and that it was helpful for Jesmer to live at the house because doing so would prevent people from “stealing” the company vehicles.

Lisa Keller, an underwriter for Erie who was familiar with the insurance policy issued to Jesmer, stated in an affidavit attached to Erie’s summary judgment motion that “[h]ad the application submitted by Anthony Jesmer disclosed that he was operating his father’s business out of the insured premises the policy would not have been written because Erie Insurance Company’s risk of loss would have increased.”

ANALYSIS

Under Tennessee law, only certain misrepresentations in an application for insurance render a policy void from inception. The pertinent statute states:

No written or oral misrepresentation or warranty made in the negotiations of a contract or policy of insurance, or in the application for contract or policy of insurance, by the insured or in the insured’s behalf, shall be deemed material or defeat or void the policy or prevent its attaching, unless the misrepresentation or warranty is made with actual intent to deceive, or unless the matter represented increases the risk of loss.

In Tennessee, in order to avoid coverage under the statute, an insurer must prove two things:

  1. that the answers to the questions on the application were false.
  2. that the misrepresentation was material, which requires proving either that the false answers were given with the intent to deceive the insurer or that the false answers increased the risk of loss.

If a misrepresentation is found to increase the risk of loss, the policy is voidable under the statute even if the misrepresentation was innocently made. The issues of whether a misrepresentation exists and whether false answers were given with “intent to deceive[]” are questions of fact to be determined by the factfinder. Once it is determined that a misrepresentation exists, it is a question of law, not fact, for the court as to whether the misrepresentation increased the risk of loss.

The court concluded that reasonable minds could not disagree that Jesmer’s insurance application misrepresented his business and occupational pursuits at the property, and that, as a matter of law, this misrepresentation increased Erie’s risk of loss. Jesmer and his father both testified that at the time of the application, Jesmer regularly stored tow trucks, and sometimes stored towed vehicles, on the premises.

Under Tennessee law, Jesmer was ultimately responsible for ensuring that his insurance application contained truthful information. An insured has the duty to read the application for insurance and to verify the information. Jesmer would have been responsible for the application’s content even if he had not read the application at all.

Jesmer’s tow-trucking activities on the premises were business pursuits within the meaning of Tennessee law because they were both motivated by profit and regular or continuous.  Jesmer argued that “[t]here was nothing going on at the residence except the tow trucks were parked at the residence until Anthony Jesmer was dispatched on a call” and that “vehicle[s] from a tow” were occasionally, though “rarely,” “brought back to the location if it was to[o] late to deliver the vehicle to its desired location.” However, the constant presence of the tow trucks on the property- specifically for the purpose of allowing Jesmer to readily dispatch them from his home-suffices to show that Jesmer’s tow-trucking activity on the premises was a customary engagement or a stated occupation of the insured. Given the undisputed testimony that at least “four to eight” tow trucks always were at the location at any given time, the court concluded that Jesmer’s tow-trucking activity at the premises was a continuous and ongoing business pursuit on behalf of himself and H&M.

To determine whether a misrepresentation increased an insurer’s risk of loss, Tennessee courts look to whether the misrepresentation is of such importance that it naturally and reasonably influences the judgment of the insurer in making the contract. Tennessee law does not require the insurer to establish that the policy would not have been issued if the truth had been disclosed. It is sufficient that the insurer was denied information which it sought in good faith and which was deemed necessary to an honest appraisal of insurability.

Answering “no” to the relevant question, while simultaneously storing tow trucks and occasionally towed vehicles on the premises, Jesmer denied Erie the opportunity to make an informed determination regarding whether, and at what cost, it was willing to insure Jesmer’s property. Common sense additionally indicates that the presence of H&M tow trucks and occasionally towed vehicles on the premises would increase the value of the insured personal property and the risk of loss.

Because Jesmer’s insurance application contained a material misrepresentation that rendered the policy void under Tennessee law, the District Court’s decision was affirmed.

ZALMA OPINION

People who acquire insurance by misrepresenting material facts forget that the covenant of good faith and fair dealing devolves equally on the insured as it does on the insurer. In this case Jesmer failed to inform the insurer, in good faith, of the risks of loss he asked it to take. The underwriter’s testimony established that the misrepresentation was material to the insurer who would have refused to insure Jesmer if it knew that he was conducting a business on the premises, a risk greater than that of a normal homeowner who does not store tow trucks and damaged vehicles on the premises. He was, therefore, his worst enemy.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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The Excellence in Claims Handling Program is Coming

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Subscribe to the Excellence in Claims Handling Program

To subscribe to the soon to be instituted Excellence in Claims Handling program please go to https://barryzalma.substack.com/welcome.

See the sample video at https://youtu.be/PnlpwgMRWxY and at https://rumble.com/Zalma. Subscribe to receive the entire Excellence in Claims Handling at https://barryzalma.substack.com/welcome.

In search of profit, insurers have decimated their professional claims staff. They laid off experienced personnel and replaced them with young, untrained, unprepared people. A virtual clerk replaced the old professional claims handler. Process and computers replaced hands-on human skill and judgment. Money was saved by paying lower salaries. Within three months of firing the experienced claims people gross profit increased.A site for the insurance claims professional and anyone who wants to know something about insurance, insurance claims, insurance coverage, and insurance law.
Insurance claims professionals are people who:

  1. • can read and understand the insurance policies issued by the insurer.
  2. understand the promises made by the policy and their obligation, as an insurer’s claims staff, to fulfill the promises made.
  3. are competent investigators.
  4. have empathy, and recognize the difference between empathy and sympathy.
  5. understand medicine relating to traumatic injuries and are sufficiently versed in tort law to deal with lawyers as equals.
  6. understand how to repair damage to real and personal property and the value of the repairs or the property.
      1. An insurer whose claims staff is made up of people who are less than professional will find itself the subject of multiple instances of expensive, counterproductive litigation.
      2. The excellence in claims handling program requires thorough training providing each member of the claims staff with a minimum of the following: How to read and understand the contract that is the basis of every adjustment, including but not limited to:
        1. The formation of the insurance policy.
        2. The rules of interpretation.
        3. Tort law including negligence, strict liability in tort, and intentional torts.
        4. Contract law including the insurance contract, the commercial or residential lease agreement, the bill of lading, nonwaiver agreements, proofs of loss, releases and other claims related contracts.
        5. The duties and obligations of the insured in a personal injury claim.
        6. The duties and obligations of the insurer in a personal injury claim.
        7. The duties and obligations of the insured in a first party property claim.
        8. The duties and obligations of the insurer in a first party property claim.
        9. The Fair Claims Practices Act and the regulations that enforce it.
        10. The thorough investigation:
        11. Basic investigation of an auto accident claim.
        12. Investigation of a construction defect claim.
        13. Investigation of a nonauto negligence claim.
        14. Investigation of a strict liability claim.
        15. Investigation of the first party property claim.
        16. The recorded statement of the first party property claimant.
        17. The recorded statement or interview of a third party claimant.
        18. The recorded statement of the insured.
        19. The red flags of fraud.
        20. The SIU and the obligation of the claims representative when fraud is suspected.
        21. Claims report writing.
        22. The evaluation and settlement of the personal injury claim.
  7. How to retain coverage counsel to aid when a coverage issue is detected.
    a. How to control coverage counsel.
    b. How to instruct coverage counsel on the issue to be resolved.
    9. Dealing with a plaintiff’s lawyer.
    10. Dealing with personal injury defense counsel.
    11. The evaluation and settlement of the property damage claim.
    12. The Appraisal process.
    13. Arbitration and mediation and the claims representative.

Claims handling without excellence is both dangerous and expensive. Insurers should develop a professional claims staff and provide excellence in claims handling because by so doing they will profit more than if they keep an inadequate and unprofessional claims staff.

The series of videos will be available soon for a monthly subscription. The video here is a tease to the beginning of the courses which will run approximately one hour each. If you are interested please subscribe to the Excellence in Claims Handling Program at https://barryzalma.substack.com/welcome.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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The Contract of Personal Indemnity

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A Video Explaining Why Property Insurance Insures People not Property

See the full video at  https://www.rumble.com/zalma and at https://youtu.be/Wxs3LDaTD3U

First party property insurance is a contract of personal indemnity. The insurer promises to indemnify the first party, the insured, in the event the insured incurs a loss as a result of one of the perils insured against by the wording of the policy. Insurance does not follow title to the land. The insurer makes a promise to the first party, the insured, that if there is a loss to property in which the insured has an interest, to pay indemnity for the loss. The “elementary principle of insurance law that fire insurance” is a contract of personal indemnity, “not one from which a profit is to be realized.” [Cigna Property & Cas. Ins. Co. v. Verzi, 684 A.2d 486, 112 Md.App. 137 (Md. App. 1995)]

The insurance claims adjuster (the adjuster) must always ascertain that the owner, or a person with some other insurable interest in the property, is the person insured and that the person insured has an interest in the property. Failure to do so could result in the insurer paying the wrong person or paying a person with no right to the benefits promised by the policy. Proceeds of a policy upon the interest of an insured are not subject to the claims of others who have an interest in the property but are not named as insured or who do not qualify as insureds by definition.

A first party property policy is considered by courts asked to interpret the conditions of the policy, a contract of personal indemnity. It is a contract made with the individual protected. The insurance does not go with the property as an incident thereto to any person who may buy that property. If it goes at all, it goes as a matter of contract for the transfer of the policy. [Estate of Cartwright v. Standard Fire Ins. Co., No. M2007-02691-COA-R3-CV, 2008 WL 4367573, *2 (Tenn. Ct.App. Sept. 23, 2008) (noting that “[t]he contract of insurance is also purely a personal contract between the insured and the insurance company, and does not attach to or run with the title to the insured’s property absent an agreement for the transfer of the policy.” Fulton Bellows, LLC v. Federal Ins. Co., 662 F.Supp.2d 976 (E.D. Tenn., 2009).

It is an elementary principle of insurance law that fire insurance is a contract of personal indemnity, not one from which a profit is to be realized. The right to recover must be commensurate with the loss actually sustained. [Glens Falls Ins. Co. v. Sterling, 219 Md. 217, 222, 148 A.2d 453, 456 (Ct.App.1959); Starkman v. Sigmond, 446 A.2d 1249, 184 N.J.Super. 600 (N.J. Super., 1982)]

To have an insurable interest, the insured must derive “a direct, pecuniary loss” from the subject matter of the contract; the loss cannot be indirect or sentimental.” [A.B. Petro Mart, Inc., 892 N.W.2d at 465; see also 14 Mich. Civ. Jur. Insurance § 135] An insurable interest in an insurance policy is determined not by the label attached to the insured’s property but by whether the insured will suffer a pecuniary loss due to the destruction of the property. [Sam D Mkt. 1 v. Selective Ins. Co. of S.C. (E.D. Mich. 2021)]


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Unambiguous Policy Condition Must be Followed

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To Obtain Full Replacement Cost Insured Must Repair or Replace Within Two Years of Loss

Railroad Avenue Properties, LLC (“Railroad Avenue”) sued Acadia Insurance Company (“Acadia”) for breach of contract. The dispute concerned the amount of insurance coverage available under a commercial property insurance policy for damages sustained by a fire at 11 Railroad Avenue. In Railroad Avenue Properties, LLC v. Acadia Insurance Company, C. A. No. 19-40155-TSH, United States District Court, D. Massachusetts (September 29, 2021) the court ruled on Acadia’s Motion for Summary Judgment.

Acadia insured the property and adjusted and paid for damage arising out of the fire loss. Acadia argued that it had no obligation to pay Railroad Avenue for the difference between the replacement and actual cash value for any property loss or damage because the property was not repaired or replaced within two years after the loss, as it set forth in the Policy

RELEVANT POLICY PROVISIONS

The Policy provides “We will not pay on a replacement cost basis for any loss or damage: (1) Until the lost or damaged property is actually repaired or replaced: (a) On the described premises; or (b) At some other location in the Commonwealth of Massachusetts; and (2) Unless the repairs or replacement are made within a reasonable time, but no more than 2 years after the loss or damage.”

Findings of Fact

Acadia issued a Businessowners Policy, providing insurance coverage to Railroad Avenue in the event of various casualties, including loss due to fire. On November 18, 2017, the Property sustained severe damage from a fire. Given the extent of the damage, the building was determined to be a total loss and would require a rebuild.

Acadia was notified promptly. The Fire Loss was caused by an unidentified arsonist. Railroad’s public adjuster agreed with Acadia’s estimate to replace the structure but reserved the right to seek an additional $25,000 in ordinance or law coverage arising out of the anticipated need to install sprinklers when the building was rebuilt.

After the fire, Railroad hired a contractor, RGN Construction Management, LLC, (“RGN”) to design and construct a replacement building.

On February 22, 2018, Acadia received a Proof of Loss executed by Railroad Avenue. The Proof of Loss indicated that: (a) the Replacement Cost Value of Repair (excluding the potential $25,000 code claim) was $808,468.13; (b) the Actual Cash Value was $610,928.46; and, (c) after deducting the deductible amount ($10,000) and the advance payment ($25,000), the net Actual Cash Value was $575,539.67.

Christopher Redmond inspected the Property on September 27, 2018. Redmond observed that the subject building had been razed, all debris had been removed from the premises, but there was no indication that any reconstruction had begun. Railroad Avenue requested a six-month extension on November 5, 2019, about two weeks before the two-year anniversary of the fire, stating that construction would done in four months. Acadia did not grant an extension to the two-year rebuild requirement under the Policy.

Legal Standard

In deciding a case on summary judgment, the Court views the facts in the light most favorable to the non-moving party and makes all reasonable inferences in that party’s favor. Once the moving party shows the absence of any disputed material fact, the burden shifts to the non-moving party to place at least one material fact into dispute.

Under Massachusetts law, the interpretation of an insurance contract is a question of law.

DISCUSSION

Railroad Avenue claims that it was entitled to the replacement cost to repair and/or replace the Property and seeks to recover the difference between the replacement cost and the ACV. Railroad Avenue also asserts that it is entitled to payment under the Ordinance or Law provision of the Policy which entitles it to recover increased costs incurred in connection with the repair and replacement of damaged property to bring the repaired/replaced property into minimum compliance with building, zoning or land use ordinance or law (here, a sprinkler system).

Acadia contends that the clear and unambiguous language of the Policy provides that the Railroad Avenue is not entitled to replacement cost or ordinance cost unless the damaged property is repaired or replaced within two years of the date of loss. Because it is undisputed that Railroad Avenue did not repair or replace the Property within two years of the date of loss, Acadia argues that Railroad Avenue was not entitled to recover replacement cost or ordnance cost.

The plain language in the Policy provides that Railroad Avenue is not entitled to recover replacement or ordinance cost under the Policy until the damaged property is actually repaired or replaced. Moreover, such repairs or replacement were to be made as soon as reasonably possible and must have been completed within two years of the date of loss.

The requirement that the damaged property be repaired or replaced is a condition precedent to the insured being entitled to replacement cost and ordinance cost proceeds. That is, the insurer is not liable to pay either replacement or ordinance unless and until the insured has met all necessary conditions, i.e., repaired or replaced the damaged property. If the time by which the condition must be fulfilled ends the condition remains unsatisfied, the obligor’s duty is discharged unless the obligor excuses fulfillment of the condition.

Replacement cost coverage is not triggered until the damaged property has actually been “repaired or replaced” by Railroad Avenue, and is only available if Railroad Avenue makes such repairs or replacement “within a reasonable time, but no more than 2 years after the loss or damage.”

Railroad Avenue argues that the condition was satisfied because it intended to rebuild, was in the process of rebuilding, others caused delays, and because it had executed construction contracts within two years of the loss,

Performance of the condition precedent was not excused. Therefore, Railroad Avenue is left to argue that Acadia breached its obligations under the Policy and prevented the condition precedent from being met. Moreover, the burden of proof is on Railroad Avenue to establish that Acadia prevented it from complying with the condition that that the damaged Property be repaired and replaced within two years of the LossThe undisputed evidence establishes that Acadia acted promptly in investigating the loss, providing its estimate and paying the claim. Defendant’s Motion for Summary Judgment was granted.

ZALMA OPINION

The District Court applied the clear and unambiguous language of the policy. The insured failed to repair. In fact all they did in the two years after the loss was demolish the fire damaged structure. They asked for an extension of the deadline only two weeks before it expired which request was denied and the condition precedent applied. Insurance is a contract and if its conditions are clear and unambiguous they must be applied if not excused.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

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Adjusting Liability Claims

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A Video Explaining the Need for Professional Liability Claims Adjusters

See the full video at https://youtu.be/LRzKCI_DZJM and at https://www.rumble.com/zalma

Adjusting liability insurance claims requires skill, patience, knowledge of insurance, basic knowledge of tort and contract law, and knowledge and experience as an investigator. To properly and effectively perform the duties of a liability claims adjuster, he or she must be capable of effectively dealing with the following basic obligations:

  1. To understand the law of torts as applied in the state where the adjuster works.
  2. To understand the law of contracts as applied in the state where the adjuster works.
  3. To understand sufficient medical terminology to be able to evaluate claims of injury.
  4. To understand the costs to repair or replace damaged real or personal property.
  5. To understand how to read and apply the terms and conditions of a liability insurance policy to a particular fact situation developed by his or her investigation.
  6. To understand how to thoroughly investigate all claims assigned.
  7. To conduct an investigation of every claim assigned fairly and in good faith with an intent to find coverage for the loss presented by the insured.
  8. To be able to effectively, fairly and in good faith negotiate with claimants and lawyers to resolve bodily injury or property damage claims asserted against an insured.
  9. To ascertain that the insurer pays promptly all claims the insurer owes under the contract.
  10. To resist, and recommend against payment of all claims the insurer does not owe under the contract of insurance.

This Compact Book of Adjusting Liability Claims- Third Edition is designed to provide the new adjuster with a basic grounding in what is needed to become a competent and effective liability claims insurance adjuster. It is also designed to work as a refresher for the experienced adjuster.

The adjuster must be prepared able to show empathy but not sympathy while professionally investigating a liability claim. In addition, the adjuster must be able to salve the emotions of the claimant and the insured, explain why in the law and the policy it was appropriate to pay, or not pay, the claimant and that a settlement is in the best interest of both the insured and the insurer the adjuster represents.

ZALMA OPINION

The key to every insurance company is a staff of insurance claims professionals dedicated to keeping the promises made by the policy. Failure to have a staff of professional claims handlers is the fastest means by which an insurer can fail.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Criminal Caused Suit on Policy to Drag on for More than Six Years

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Court Finally Stopped an Unconscionable Level of Overlitigation

United States District Judge Gary R. Brown was faced with a legal dispute that, perhaps because the defendant was a criminal, went on for years without a final disposition. In Principal Life Insurance Company v. Jason P. Brand, No. CV 15-CV-3804, United States District Court, E.D. New York (September 29, 2021) the case was reduced to seven years on disputes that appeared to be relatively straightforward:

  1. defendant Brand obtained a disability policy in early 2012 from plaintiff Principal Life, after being less than forthcoming about his health history.
  2. In June 2014 – prior to the submission of Defendant’s disability claim on November 14, 2014 – the New York State Attorney General’s office raided Defendant’s offices, seizing his computers and physical files, leading to indictment on October 16, 2014 of Defendant and his businesses, DASO Development Corp. and Narco Freedom, Inc., for insurance fraud in the first degree and grand larceny in the second degree, charges to which defendant would plead guilty.
  3. Defendant filed a disability claim based upon anxiety;
  4. Principal Life, for its part, acted quickly and rescinded the policy and
  5. Filed a declaratory relief action.

ANALYSIS

This litigation has been pending since. The case, in which defendant was originally unrepresented, yielded an unconscionable level of overlitigation which added unneeded complexity. After more than six years of litigation, hundreds of court filings, and approximately 75 orders issued by at least five different judicial officers the case was placed before Magistrate Judge Wicks.

Amidst this chaos, Judge Wicks issued a Report and Recommendation to USDC Judge Brown regarding summary judgment motions by both parties. His findings and conclusions were straightforward and simple:

  • the plain language of the policy prevented plaintiff from rescinding the policy in absence of a judicial determination of fraud.
  • The claimed disability, indisputably emanating from defendant’s criminal conduct, were expressly excluded from coverage.

Judge Brown concluded that\ Judge Wicks Report, introducing clarity to the morass created by the litigants, should well end the case.

But the pandemonium continued with both parties disputing the recommendations. Both parties objected, on several far-flung grounds, to Judge Wicks’ determination.

As a result, Judge Brown was required to review the R&R, recognizing that he may accept, reject, or modify, in whole or in part, the findings or recommendations made by the magistrate judge.

Judge Brown, thoroughly familiar with this matter, conducted a careful review of Judge Wicks’ thoughtful and thorough R&R. Judge Wicks’ decision was found to be free from clear error. Nor do any of the issues raised via objection require alteration of the opinion.

Plaintiff’s Objections

For reasons that remain mysterious, though Judge Wicks’ decision effectively relieves plaintiff of the obligation to pay the disability claim, plaintiff insists that it remains entitled to a determination that rescission was and/or is appropriate.

Plaintiff continues to argue that it had the right to rescind the policy upon its own authority without a judicial declaration of fraud. Plaintiff lacked authority to unilaterally rescind the policy in 2015, since more than two years had elapsed, and the policy specifically required a judicial declaration of fraud before rescission.

The argument for rescission was rendered moot by Judge Wicks’s determination that defendant is not entitled to coverage under the policy. In other words, because Principal Life has been relieved of its obligation to pay the disputed claim, there remains no “substantial controversy” between the parties that would warrant a declaratory judgment.

In fact, Judge Wicks’ determination effectively secures the substance of the relief sought by plaintiff in this action. Further determination by this Court would constitute an advisory opinion.

Defendant’s Objections

Defendant’s principal objection emanates from a purported failure by plaintiff to raise the policy’s Criminal Conduct Exclusion prior to summary judgment.

Counsel’s far-flung efforts to establish that defendant was not only involved in criminal activity, or odd distinctions between criminal enterprise and criminal occupation are unavailing given the breadth of the exclusion in question. The policy clearly excludes injuries caused “in whole or in part . . ., contributed to by or result[ing] from . . . commission. . . or attempt to commit a felony”).

Judge Brown concluded, in a Solomon-like fashion:

 “Enough ink has been spilled, effort expended, and resources consumed in this case. For the reasons set forth above, the Court hereby adopts the R&R in its entirety. The Clerk shall enter judgment in favor of plaintiff consistent with this Order and close the case.”

ZALMA OPINION

People who commit insurance fraud are egregiously litigious. To drag out the case for more than six years before more than five judges is difficult to understand. To argue against a win – as did the insurer – is simply silly and the insurer should refuse to pay the fees of its counsel who filed the objections. The case was simple – the insured was a criminal whose claim of disability resulted from his criminal conduct and was, therefore, clearly and unambiguously excluded. I was surprised that Judge Brown did not assess sanctions on the parties for wasting the time of the court with an excrutiatingly overlitigation.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Sixth Circuit Concludes Twice that Covid Shutdown Not Direct Physical Loss

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For Business Interruption Coverage there Must be Direct Physical Damage

After a trial court concluded that Zurich American must go to trial over a business interruption claim due to Covid shutdowns Zurich appealed to the Sixth Circuit Court of Appeal that, in Santo’s Italian Café LLC v. Acuity Ins. Co., No. 21-3068, ___ F.4th ____, at *3 (6th Cir. Sept. 22, 2021) and in In re: Zurich American Insurance  Company, USCA, Sixth Circuit, Case: 1:20-cv-01239-DAP Doc #: 23 Filed : 09/30/21 that there must be direct physical loss of or damage to property.

The district court granted summary judgment to Plaintiffs on the insurance coverage issues asserted in their claims for breach of contract (Count I) and declaratory judgment (Count III), granted summary judgment to Zurich on Plaintiffs’ claim for bad faith denial of coverage (Count II), and certified the legal issue in Count I for interlocutory appeal under 28 U.S.C. § 1292(b).

The parties agreed that Zurich raises at least one controlling question of law for appeal: whether the policy’s coverage for “direct physical loss of or damage to property” applies to Plaintiffs’ loss of business income due to COVID-19-related government shutdown orders that halted their dine-in operations. The parties also agreed that resolution of this question may materially affect Zurich’s liability and, thus, the outcome of the litigation below.

In granting summary judgment to Plaintiffs on Counts I and III, the district court reasoned that the COVID-19-related interruption of Plaintiffs’ dine-in operations amounted to “direct physical loss of or damage to [Plaintiffs’] property” under Ohio law.

The Sixth Circuit, since the trial court’s decision against Zurich, held, however, that “a pandemic-triggered government order, barring in-person dining at a restaurant” does not qualify as “‘direct physical loss of or damage to’ the property” under Ohio law: Santo’s Italian Café LLC v. Acuity Ins. Co., No. 21-3068, ___ F.4th ____, at *3 (6th Cir. Sept. 22, 2021).

Accordingly, the petition for permission to appeal is GRANTED, the district court’s order is VACATED as to the insurance coverage issue alleged in Counts I and III, and the case is REMANDED for further proceedings consistent with this order and deny the plaintiffs’ motion.

ZALMA OPINION

These two decisions by the Sixth Circuit should stop trial courts – feeling sorry for the people losing money as a result of the governments’ actions forcing them to close their businesses and lose money. They tried to collect from their insurers and almost universally the courts have found no coverage in the U.S. No matter how sad their losses are the contract terms are clear and unambiguous and must be applied. Of course, the plaintiffs’ can try to sue the governmental entity that shut them down because it was an uncompensated taking in violation of the Fifth Amendment to the U.S. Constitution as applied to the States and Cities by the 14th Amendment.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

 

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Zalma’s Insurance Fraud Letter – October 1, 2021 – A Video

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October 1, 1979 – 2021 – Another Anniversary – Thank You

See the full Fraud Letter at https://zalma.com/zalmas-insurance-fraud-letter-2/ video at https://youtu.be/xP3qTouGQFA and at https://www.rumble.com/zalma 

Forty-one years ago today I left the world of the employed and became an entrepreneur by opening my own law firm. The law practice was incorporated shortly thereafter as Barry Zalma, Inc. When I opened for business on October 1, 1979, I had no clients and no certainty that I would have any in the future. I had borrowed money from the bank to carry me through the first six months and was concerned about my ability to pay the loan with my third child about to be born.

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

Although I retired from the practice of law, I still work an eight hour day, five days a week as a consultant, author, blogger, and videoblogger.

I was admitted to the California Bar on January 2, 1972. I practiced law in California full time until I retired from the practice of law in 2015. To those of you, in addition to Alan, who have honored me by retaining me as your lawyer, thank you for a long, productive and successful legal career.

In 2015 I asked that the California Bar render my license to practice law inactive and it agreed. I will limit my work to acting as an insurance claims handling, insurance fraud and insurance bad faith consultant, expert witness, educator and author.
I Am Not Retired. I am Only Retired from the Practice of Law.

Articles in the October 1, 2021 Issue

The EUO As a Tool

ClaimSchool, Inc. – Insurance Education

Man Bites Dog Story: State Farm Sues Chiropractors for Fraudulent Claims

Good News From the Coalition Against Insurance Fraud

Cancellation Rule Requires Contradictory Evidence to be Ignored

Health Insurance Fraud Convictions

Videos on YouTube and Zalma on Insurance from Barry Zalma

Other Insurance Fraud Convictions

New Books for the Insurance Claims Professionals


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Requirements to Maintain Insurance as Part of a Construction Contract

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Always Be Ready to Fulfill the Conditions of a Construction CGL Policy

See the full video at https://www.rumble.com/zalma and at https://youtu.be/cp2sKP5PySU

Insurers who insure the liability of contractors will often include in their policy a warranty that compels the general contractor to obtain proof that all its subcontractors are insured. In an important case, North American Capacity Insurance Co. v. Claremont Liability Insurance Co., Court of Appeal, Second District, 177 Cal.App.4th 272, No. B207878 (Cal.App. Dist.2 08/04/2009), dealing with a clause rarely litigated, the California Court of Appeals enforced such an agreement and issued a warning to all general contractors who do not comply with similar warranties that they may be eliminating their own coverage. In this case the warranty or condition required that the insured follow its general business practice to get hold harmless agreements and certificates of insurance from its independent contractors. The insured failed to do so and tried to enforce the contracts claiming, unsuccessfully, that it did not need to comply with the warranty.

The insurance industry also uses similar warranties that require that each independent contractor name the general contractor, the owner, and/or the developer as additional insureds.

If the general contractor does not have in its possession certificates of insurance from every independent contractor at the time the work begins and throughout the construction, the insurance is unenforceable.

Every general contractor, developer, and subcontractor that uses subcontractors must be certain to obtain the certificates required by similar policy terms. Failure to do so can be devastating.

The Court of Appeal, in reaching its decision, applied settled doctrines with regard to the interpretation of an insurance policy. Such interpretation, in California, is a question of law that the Court of Appeals can review as if it were the trial court. [Powerine Oil Co., Inc. v. Superior Court (2005) 37 Cal.4th 377, 390; AIU Ins. Co. v. Superior Court (1990) 51 Cal.3d 807, 818)] Notwithstanding that insurance policies have special features, they are still contracts to which ordinary rules of contractual interpretation apply.

 


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Proactive Insurer Has to Fight to Renew Judgment Against Convicted Fraudster

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Insurer’s $7,870,557.89 Judgment Against Fraudster Stands

Insurer May Collect on Default Judgment Against Fraudster

In People Of The State Of California, ex rel. Interinsurance Exchange Of The Automobile Club Of Southern California v. Alex Semyon Mirsky, B297321, California Court of Appeals, Second District, Seventh Division (September 21, 2021) Alex Semyon Mirsky appealed from the superior court’s denial of a motion to vacate a 2013 renewal of a default judgment and the underlying default judgment.

In 2003 the superior court entered a default judgment of over $7.8 million against Mirsky. Interinsurance Exchange of the Automobile Club of Southern California (Interinsurance Exchange) renewed the judgment in 2013, and in 2018 it mailed notice of the renewal to Mirsky at an address Interinsurance Exchange claimed was Mirsky’s last known address. Mirsky filed a motion to vacate the renewal of judgment, or, in the alterative, vacate the default judgment under Code of Civil Procedure section 473, subdivision (d). The trial court denied the motion, concluding Mirsky’s motion to vacate the renewal of judgment was untimely and Mirsky failed to meet his burden to show the default judgment was void.

FACTUAL BACKGROUND

The Criminal Actions for Fraud and Conspiracy

Mirsky was charged in an information filed in federal court with three counts of mail fraud and conspiracy “to defraud and to obtain money and property from various insurance carriers by means of false and fraudulent pretenses, representations and promises.” Mirsky allegedly invested in a Texas law office and used the office to prepare and submit fraudulent medical and property damage insurance claims made by individuals who engaged in staged or fabricated automobile accidents.

Mirsky was charged in a felony complaint that alleged Mirsky committed insurance fraud. Mirsky entered into a negotiated plea of guilty to the charges in the federal and state actions. Mirsky was sentenced to only five years formal probation on the condition he serve a year in state prison (to run concurrent with his federal prison sentence) and to pay $20,000 in restitution. On July 12, 1999 the federal court sentenced Mirsky to 21 months in federal prison.

The Civil Action and Default Judgment

Interinsurance Exchange filed a qui tam action on behalf of the State of California against Mirsky and 26 other defendants for violation of the Insurance Fraud Prevention Act. The complaint alleged the ring knowingly and intentionally caused approximately 475 alleged automobile collisions to be reported to The Exchange as incidents which caused bodily injury. These collisions involved approximately 855 separate claimants. Interinsurance Exchange sought damages in an amount equal to three times the amount of each claim for compensation by the defendants, plus a civil penalty of $10,000 for each violation of California Insurance Code § 1871.1. Interinsurance Exchange filed a statement of damages seeking $15,674,374.50 from Mirsky.

Mirsky did not respond to the complaint. Later Interinsurance Exchange filed its first amended complaint. Mirsky was served with the first amended complaint by mail at the Fuller Avenue address and later the Interinsurance Exchange filed a second amended complaint, which generally contained the same allegations and prayer for relief, but it attached 27 exhibits identifying each of “the claims submitted to the Exchange for which a defendant is individually liable to the Exchange.”  The second amended complaint was also served by mail on Mirsky at his Fuller Avenue address.

Interinsurance Exchange served Mirsky with a request for default by mail at the federal prison in Nevada. On February 20, 2001 the superior court clerk entered Mirsky’s default. Mirsky, representing himself, filed and served Interinsurance Exchange with an application for order extending time to answer.

Entry of Default Judgment

After a hearing the trial court (Judge Carolyn B. Kuhl) granted Interinsurance Exchange’s request for a default judgment against Mirsky and others. Mirsky did not appear at the hearing. On February 20 the court entered a default judgment against Mirsky in the amount of $7,131,333.99 in penalties under Insurance Code section 1871.7, plus attorneys’ fees of $739,223.90, for a total of $7,870,557.89. Interinsurance Exchange served Mirsky with notice of entry of court judgment by first-class mail at his Fuller Avenue address.

Judgment Debtor Examination of Mirsky

On August 16, 2018 the superior court ordered Mirsky to appear for a judgment debtor examination on October 19. Eventually Mirsky appeared in court for his examination. The trial court, over Mirsky’s objection, ordered the examination to go forward. Mirsky invoked his Fifth Amendment privilege against self-incrimination.

The superior court denied Mirsky’s motion to vacate the renewal of judgment as untimely. The trial court denied Mirsky’s motion, explaining,

DISCUSSION

Before the 1982 enactment of the Enforcement of Judgments Law (§ 680.010 et seq.), the sole method by which a judgment creditor could extend the enforcement period of a money judgment was by obtaining a new judgment against the judgment debtor in an independent action based on the judgment. Under the Enforcement of Judgments Law, a money judgment is enforceable for 10 years from the date it is entered. The law created a summary procedure for renewal of the judgment by the creditor by filing an application for renewal with the clerk of the court before expiration of the 10 year period.

The renewal process is simple. The judgment debtor bears the burden of proving, by a preponderance of the evidence, that he or she is entitled to relief under section 683.170.

It is undisputed that the renewal of judgment was entered and notice was mailed to Mirsky. Thus, if service was proper, Mirsky’s filing of a motion to vacate the renewal of the judgment under section 683.170 on January 22, 2019-over seven months later-was untimely.

The Superior Court Did Not Abuse Its Discretion In Denying The Motion To Vacate The Renewal Of Judgment

There is no statutory requirement that the notice of renewal be served on the judgment debtor in order for the renewal to be effective. There is no specified time period within which the renewal of judgment must be served on the judgment debtor

The Trial Court Did Not Err in Finding the Default Judgment Was Not Void and Denying Mirsky’s Motion To Vacate the Judgment

After a defendant’s default has been entered, if a complaint is amended in matter of substance as distinguished from mere matter of form, the amendment opens the default, and unless the amended pleading be served on the defaulting defendant, no judgment can properly be entered on the default”’ and any judgment is thus void.

In this case, the second amended complaint did not increase the amount of damages sought against Mirsky, add or change a cause of action based on different facts or legal theory, or indicate the existence of any defenses or grounds for avoiding liability that were not already reasonably apparent from the facts set forth in the initial complaint.

Although the second amended complaint provided additional specificity on which fraudulent claims were made as to which defendants for purposes of pleading the fraud claim, the unfair business claim was found to be sufficient. And the allegations as to Mirsky’s leadership of a ring to commit insurance fraud remained the same. Further, Mirsky was well aware from the allegations in the initial complaint (and the prior criminal actions) what constituted the alleged fraudulent conduct for which Interinsurance Exchange sought damages and penalties. Moreover, Mirsky was served with the second amended complaint and conceded that he had received it. T

DISPOSITION

The order denying Mirsky’s motion to vacate the renewal of judgment or the default judgment is affirmed. Interinsurance Exchange is entitled to recover its costs on appeal.

ZALMA OPINION

Insurance fraud is estimated to take from the insurance industry between $80 and $300 billion every year. No one really knows.  Mr. Mirsky was a major player in fraudulent insurance schemes and was convicted of crimes relating to the fraud in both state and Federal Court. The Interinsurance Exchange, a major victim of his crime spree filed a qui tam suit and obtained a judgment of almost $8 million and has been adding interest to that judgment since it was entered. Since he was in prison attempts to execute on the judgment was delayed and the court renewed the judgment only to find Mirsky – attempting to avoid paying the judgment – fought in trial and the appellate court. The court properly held him to the judgment and allowed the Interinsurance Exchange to work to collect the judgment on behalf of the state.

 


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to my articles at https://zalma.substack.com,  the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

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Investigating the Extent of a Property Loss

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How the Adjuster and Insured Agree to Amount of Loss

See the full video at https://www.rumble.com/zalma and at https://youtu.be/iJDEwRp9N84

To aid the insured in his or her obligation to prove the loss, the adjuster must, on the first visit, establish with the insured a detailed scope of loss. This means that the adjuster and the insured (or the insured with his or her Public Insurance Adjuster (PA)) must walk through the insured’s house or business and agree to exactly what was damaged and destroyed as a result of the peril insured against.

The adjuster can get this agreement orally with a tape recorder or write it down on paper. The scope of loss must be detailed. Descriptions, including room dimensions; materials like moldings, flooring, wall coverings, and fixtures; information about special features, openings, casements, detailing, moldings, and other architectural features must be part of the scope of loss. The scope of loss must be as complete and accurate as possible on a first inspection.

The adjuster must never, at the time of the first inspection of the damaged property:

  • take a quick look around and ask the insured to fill out a property loss form at his convenience;
  • leave the insured with blank forms, except for supplemental items learned of after the initial scope was completed;
  • take a partial scope and attempt to do the rest later;
  • rely on the expertise of the insured’s public adjuster; or
  • rely on a reconstruction contractor to establish the scope.

The adjuster should never make promises that cannot be kept. The adjuster must advise the insured that the adjuster will – if necessary – be retaining experts in the valuation and repair of the type of property that is involved. These experts will bid on the repair and replacement from the agreed scope. The adjuster should explain to the insured that the scope of loss may change when some demolition is done or when an expert examines the property, to change the extent of the scope and that it is just a first evaluation based only on visible damage.

Before any estimates for repair are prepared the adjuster must present the insured with a copy of the agreed scope and inform the insured that he may, if he wishes, obtain similar opinions based on the same agreed scope.

The adjuster should provide two general contractors (different from the construction consultant – if one was used to help the adjuster set the scope – with a copy of the adjuster’s scope of loss. Each contractor should prepare detailed estimates of the costs of repair based upon, and written in the same order as, the adjuster’s scope of loss so that the adjuster can identify the low bidder. The adjuster then should prepare an estimate of the cost of repairs for comparison with the estimates made by the contractors using the scope of loss and estimating programs like Xactimate, Marshall and Swift or Boekhs.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Hospital Must Bill Primary Insurer Even if Medicare or Medicaid First Before Asserting a Lien

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Colorado State Law Protects Injured Persons from Premature Liens from Hospitals

The Supreme Court of Colorado examined the interplay between Colorado’s hospital lien statute, § 38-27-101, C.R.S. (2020) (the “Lien Statute”), and the federal Medicare Secondary Payer statute, 42 U.S.C. § 1395y (2021) (the “MSP Statute”). Specifically, it needed to decide whether, under the Lien Statute, a hospital must bill Medicare before it can file a lien against a patient who has been injured in an accident and whose primary health insurance is provided by Medicare. In Peggy Harvey v. Catholic Health Initiatives d/b/a Centura Health-St. Anthony Hospital and Centura Health Corporation, Eileen Manzanares v. Centura Health Corporation a/k/a Catholic Health Initiatives Colorado, d/b/a St Mary-Corwin Hospital of Pueblo, Colorado, d/b/a Centura Health-St Mary Corwin Medical Center, Nos. 20SC261, 2021 CO 65, 20SC784, Supreme Court of Colorado, En Banc (September 13, 2021) the Supreme Court resolved the dispute.

FACTS

The Lien Statute provides that before a lien is created, every duly licensed hospital that treats a person injured through the negligence or other wrongful acts of another must first submit all reasonable and necessary charges for hospital care or other services for payment to the property and casualty insurer and the primary medical payer of benefits available to and identified by or on behalf of the injured person, in the same manner as used by the hospital for patients who are not injured as the result of the negligence or wrongful acts of another person, to the extent permitted by state and federal law.

The Supreme Court concluded Medicare is a patient’s primary health insurer, the Lien Statute requires a hospital to bill Medicare for the medical services provided to the patient before asserting a lien against that patient. Such an interpretation is consistent with the language of the Lien Statute, which distinguishes between “the property and casualty insurer,” on the one hand, and “the primary medical payer of benefits,” on the other, and also reflects the legislature’s intent to protect insureds from abusive liens. Moreover, this interpretation yielded no conflict between the Lien Statute and the MSP Statute. Hospital liens are governed by state, not federal, law, and merely enforcing our Lien Statute does not make Medicare a primary payer of medical benefits in violation of the MSP Statute.

Both Harvey and Manzanares had automobile insurance, Harvey through GEICO and Manzanares through State Farm. These policies included medical payment (“Med Pay”) coverage for medical bills incurred as a result of a motor vehicle accident. In addition, the third-party tortfeasors who caused Harvey’s and Manzanares’s injuries also had automobile insurance.

Both Harvey and Manzanares advised Centura of all of the available health and automobile insurance policies. Centura then assigned the women’s accounts to a collection agency, Avectus Healthcare Solutions, for processing, and Avectus apparently submitted Centura’s medical expenses to each of the automobile insurers involved, including the automobile insurers for Harvey, Manzanares, and the third-party tortfeasors. Within two weeks after submitting these charges to the various automobile insurers (and within two months of the women’s respective discharges from their hospital stays), Centura filed hospital liens against both of the women.

Centura conceded that it did not bill either Medicare or Medicaid before filing the above-described liens.

Both Harvey and Manzanares subsequently brought suit, alleging that Centura had violated the Lien Statute by not billing Medicare for the services provided to the women prior to filing the above-described liens.

The district courts concluded that Centura had no obligation to bill Medicare before filing the liens at issue because (1) the Lien Statute requires only that hospitals bill primary medical payers of benefits if allowed under both state and federal law and (2) although the women’s primary health insurer was Medicare, federal law required that Medicare be treated as a secondary payer. Harvey appealed, but in a unanimous, published decision, a division of the court of appeals affirmed the district court’s judgment in her case. The Court of Appeal agreed and the appeal was forwarded to the Supreme Court.

ANALYSIS

The Supreme Court concluded that the pertinent language of the Lien Statute is ambiguous, and that the Lien Statute required Centura to bill Medicare before filing liens against Harvey and Manzanares.

The Lien Statute and the MSP Statute

The Lien Statute provides, in pertinent part:

Before a lien is created, every hospital duly licensed by the department of public health and environment . . . which furnishes services to any person injured as the result of the negligence or other wrongful acts of another person and not covered by the provisions of the “Workers’ Compensation Act of Colorado”, articles 40 to 47 of title 8, C.R.S., shall submit all reasonable and necessary charges for hospital care or other services for payment to the property and casualty insurer and the primary medical payer of benefits available to and identified by or on behalf of the injured person, in the same manner as used by the hospital for patients who are not injured as the result of the negligence or wrongful acts of another person, to the extent permitted by state and federal law. [§ 38-27-101(1) (emphases added by the court).]

Because both Harvey and Manzanares were Medicare recipients, the MSP Statute also applies in this case and informs the Supreme Court’s analysis of what is “permitted” under federal law.  The MSP provisions do not create lien rights when those rights do not exist under State law. Where permitted by State law, a provider, physician, or other supplier may file a lien for full charges against a beneficiary’s liability settlement.

The issue before the Supreme Court was the meaning of “primary medical.” The General Assembly’s primary intent to protect accident victims from the aggressive lien practices that some hospitals had employed at that time tends to support the statutory construction advanced by Harvey and Manzanares in this case.

When Medicare is a patient’s primary health insurer, the Lien Statute requires a hospital to bill Medicare for the medical services provided to the patient before asserting a lien against that patient.

First, the MSP Statute does not govern hospital liens; such liens are matters of state law.

Second, Centura correctly observes that, subject to certain exceptions, the MSP Statute prohibits Medicare from paying any hospital bills to the extent that “payment has been made or can reasonably be expected to be made under . . . an automobile or liability insurance policy or plan.” § 1395y(b)(2)(A)(ii). But nothing in the Lien Statute requires the hospital to bill Medicare if such payment will be made, or is expected to be made, by the property and casualty insurers. Under the Lien Statute, a hospital must bill any liability and casualty insurers-and thereafter, if the charges remain unpaid and the promptly period has expired, Medicare-before asserting a hospital lien.

Third, the Lien Statute in no way conflicts with Congress’s purpose in passing the MSP Statute, namely, “to reduce the costs of the Medicare program by making Medicare the secondary payer in certain situations.” Smith v. Farmers Ins. Exch., 9 P.3d 335, 338 (Colo. 2000).

Conclusion

For these reasons, the Supreme Court concluded that when Medicare is a patient’s primary health insurer, the Lien Statute requires a hospital to bill Medicare for the medical services provided to the patient before asserting a lien against that patient. This interpretation is consistent with the language of the Lien Statute and reflects the legislature’s intent to protect insureds from oppressive hospital liens. In addition, this interpretation is consistent with the MSP Statute because hospital liens are governed by state, not federal, law and merely enforcing our Lien Statute does not make Medicare a primary payer of medical benefits in violation of the MSP Statute.

Accordingly, the Supreme Court reversed the decisions of the division below in Harvey v. Centura Health Corp., 2020 COA 18M, 490 P.3d 564, and of the district court in Manzanares v. Centura Health Corp., No. 19CV30025 (D. Ct., Pueblo Cnty. July 16, 2019).

ZALMA OPINION

The Lien Statute in Colorado was enacted to protect accident victims from abuse by hospitals that asserted liens against patients immediately upon discharge even though they were insured by Medicare, Medicaid or casualty insurance. The Supreme Court confirmed the intent of the statute to protect patients from abuse and required that the hospital bill Medicare and any available casualty insurance before asserting a lien. The hospital, therefore, has no right to abuse a patient who is insured, even if insured by federal Medicare or Medicaid.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

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The Equitable Remedy of Subrogation

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A Video Explaining how to Obtain a Subrogation Recovery

See the full video at https://www.rumble.com/zalma  and at https://youtu.be/3ySaMge6o6k

Equity allows creative remedies for wrongs that do not fit within the confines of traditional tort or contract remedies (i.e., with cash). The ancient maxim “for every wrong there is a remedy” (California Civil Code § 3523) applies to subrogation rights. The maxims were adopted from the common law of England and are relied on in all jurisdictions. In California, the maxims were codified in its Civil Code.

The purpose of equitable subrogation is “to prevent forfeiture and unjust enrichment.” [Eastern Savings Bank, FSB v. Pappas, 829 A.2d 953, 957 (D.C.2003)]

The roots of equitable subrogation lie in the concept of remedying a mistake. In Hicks v. Londre, 125 P.3d 452, 458 (Colo.2005) the Colorado Supreme Court observed that equitable subrogation is appropriate when mistake is involved. [Joondeph v. Hicks, 235 P.3d 303 (Colo., 2010)]

Equitable subrogation is a doctrine that allows one who has discharged the debt of another to succeed to the rights of the satisfied creditor. For example, if Creditor # 3 pays off a debt owed to Creditor # 1 by the same debtor, equitable subrogation would enable Creditor # 3 to jump ahead of Creditor # 2 in priority for repayment. The doctrine, which began in the English courts of equity as a way for a surety to seek repayment from a defaulting debtor, has been applied by the Delaware Court of Chancery for over a century. [Eastern Savings Bank, FSB v. Cach, LLC, Supreme Court of Delaware, 124 A.3d 585 (2015)]

ZALMA OPINION

Subrogation is an equitable remedy and with the assistance of a professional claims person becomes a profit center to an insurer since it can reduce or fully reimburse the insurer for monies paid to an insured. Every claims investigation must include an investigation of subrogation potential.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Investigation of Qui Tam Suit Not Covered by D&O Policy

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No Coverage for Qui Tam Suit Filed Before Inception of Policy

Responding to lawsuits and investigations is expensive (even when they are without merit). That reality became clear when Plaintiff Springstone, Inc. incurred substantial legal fees responding to a government subpoena based on a sealed qui tam lawsuit. Springstone thought it had purchased insurance from Defendant Hiscox Insurance Company, Inc. to cover it from certain legal claims, including the expenses of dealing with the government. In Springstone, Inc. v. Hiscox Insurance Company, Inc., No. 20-6014, United States Court of Appeals, Sixth Circuit (September 17, 2021) the Sixth Circuit was asked to compel an insurer to pay for defense costs resulting from a whistleblower law suit that Hiscox proved to the trial court it was not covered.

FACTS & POLICY WORDING

Springstone provides behavioral health services across several facilities. In January 2017, it purchased insurance from Hiscox. That insurance plan included Directors &Officers (D&O) Liability Coverage. Only two parts of that coverage were relevant to the litigation:

  1. Coverage B: Company Reimbursement Coverage

This D&O Coverage Part shall pay the Loss of a Company arising from a Claim first made against an Individual insured during the Policy Period or the Discovery Period (if applicable) for any actual or alleged Wrongful Act of such Individual Insured, but only when and to the extent that such Company has indemnified such Individual Insured for such Loss.

  1. Coverage C: Company Coverage

This D&O Coverage Part shall pay the Loss of a Company arising from a Claim first made against a Company during the Policy Period or the Discovery Period (if applicable) for any actual or alleged Wrongful Act of a Company.

In July 2016, a qui tam lawsuit was filed-under seal-against Springstone. It alleged that “Springstone had violated the False Claims Act by obtaining reimbursement from Medicare and Medicaid for medically unnecessary services that it provided to patients.” A year after the lawsuit was filed, the Office of the Inspector General for the Department of Health and Human Services sent Springstone a subpoena related to its investigation of the qui tam complaint. That subpoena requested documents related to Springstone’s patient treatment and management practices.

A few months later, Springstone informed Hiscox that it had received the subpoena and sought coverage for its response under the D&O Coverage. Hiscox denied Springstone’s request. In its response, Hiscox stated that there was no “Claim,” and the subpoena did not allege a “Wrongful Act.” A large legal bill ensued.

In 2019, the qui tam lawsuit was dismissed, and the complaint was unsealed. Springstone informed Hiscox of the lawsuit and again sought coverage for its response. Hiscox denied that second request for coverage.

Springstone sued Hiscox alleging: (1) a breach of contract; (2) common law bad faith; (3) violations of the Kentucky Unfair Claims Settlement Practice Act and Kentucky Consumer Protection Act; and (4) unjust enrichment. Springstone also sought a declaration of rights under the insurance agreement and punitive damages. Hiscox removed to federal court and filed a motion to dismiss. The district court agreed with Hiscox and found that neither Coverage B nor Coverage C covers the costs of responding to the subpoena and that Coverage C specifically excludes non-monetary relief.

ANALYSIS

Springstone alleges that the qui tam action and the government subpoena triggered coverage under its D&O Policy. Under the plain meaning of the Policy, Hiscox could deny coverage for three reasons.

  1. the qui tam lawsuit was not filed during the policy period,
  2. Springstone failed to indemnify any individual as required by Coverage B, or
  3. non-monetary relief is excluded from Coverage C.

Underlying Qui Tam

Springstone asserts that the underlying qui tam lawsuit constitutes a Claim under the Policy. The qui tam complaint was filed six months before the Policy Period. The definition of made is the past simple and past participle of make. A lawsuit is first produced or created when it is filed not when it was unsealed.

Indemnification

Coverage B also requires indemnification of an Individual Insured. And indemnification is a duty to make good any loss, damage or liability incurred by another. In other words, the Individual Insured must have a duty to pay the loss. Indemnity in its most basic sense means reimbursement, and may lie when one party discharges a liability which another rightfully should have assumed. Springstone did not indemnify any Individual Insured by retaining counsel to respond to a subpoena directed at the company.

Exclusion

Under Coverage C, “[t]he Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured: seeking fines or penalties or nonmonetary relief against the Company.”  Even if the subpoena was a written demand for nonmonetary relief, it is excluded from Coverage C. Importantly, the exclusion forecloses payment for any Loss, including Defense Costs. Under these circumstances, Hiscox properly denied coverage.

Remaining claims

The district court appropriately dismissed the remaining state law claims because Hiscox was entitled to deny Springstone’s insurance claims and, as a result, there cannot support a claim of bad faith.

Springstone understandably sought reimbursement for an expensive investigation. But the insurance it purchased did not cover either the actions of the government or a complaint filed before the Policy Period. Springstone, therefore, recovers nothing.

ZALMA OPINION

Springtone learned, by this litigation, that no insurance policy covers every possible incident that might cost the insured money to defend every possible event. In addition, a D&O policy is claims made and there is no right to recover if the suit was filed – as was the qui tam suit, before the policy came into effect. Insurance covers a lot but not everything.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

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How to Be a Whistleblower

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A Video On How an Individual Can Help the Government Defeat Fraud

See the full video at https://youtu.be/tSLAh4103AA  and at https://www.rumble.com/zalma

If an individual has knowledge that a false claim was submitted to the government, that person can elect to become a whistleblower and retain an attorney who will draft a complaint and a disclosure statement. The whistleblower will file these two documents under seal in US district court and send copies to the Department of Justice.

After the complaint is filed, the Justice Department has 60 days to investigate the allegations and determine whether it will join the lawsuit. If the Justice Department does join the lawsuit, it has the primary responsibility for prosecuting the case and can limit the whistleblower’s participation in the action. If the qui tam action is successful, the whistleblower’s share of the recovery will range from 15 to 30% depending on the extent of the individual’s investigation. The judge normally determines the percentage.

If the department decides not to participate, the whistleblower has the right to continue to pursue the claim on behalf of the US and will receive a higher portion of any recovery received.

The False Claims Act states that any person can file a qui tam action as long as they have direct and independent knowledge of the fraud and this knowledge was not obtained from a “public disclosure.” The definition of “person” includes not only individuals, but also businesses and state or local government entities. The most common plaintiffs in qui tam actions are employees of government contractors, healthcare organizations, and local, state, or federal government.

ZALMA OPINION

Police agencies and prosecutors seem loathe to file insurance fraud cases. It is important, therefore, that insurers, agents, brokers and claims handlers recognize the opportunities provided by the false claims act that can either force the prosecutor to join in or take the profit out of the fraud business.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Immediate Offer of Policy Limits Rejected by Plaintiff’s Lawyer Seeking a Bad Faith Case

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Prompt Offer of Policy Limits is Good Faith Claims Handling

After a serious auto vs. motorcycle the auto’s insurer promptly offered to settle a bodily injury claim for the $50,000 policy limits within weeks of the accident. Pointing to overbroad language in a suggested release form, which the insurer made clear it was willing to modify, the claimant rejected the offer and insisted on a trial. After a stipulated judgment of $14,900,000 the plaintiffs sought to enforce the judgment against the insurer. In Raul A. Pelaez, as Limited Guardian of the Person and Property of John Poul Pelaez, ward, and Michael Adam Conlon, Jr. v. Government Employees Insurance Company, No. 20-12053, United States Court of Appeals, Eleventh Circuit (September 20, 2021) the Eleventh Circuit determined that good faith claims handling resolves claims of the tort of bad faith.

FACTS

On April 13, 2012, Michael Conlon had just turned eighteen and was driving his mother’s car to the high school prom when he turned into a median and in front of John Pelaez who was on a motorcycle. The motorcycle hit Conlon’s car with such force that it spun the car 180 degrees, and the impact injured Pelaez seriously enough that he was airlifted to the hospital. GEICO had issued Conlon’s mother a policy covering her car and Conlon as an additional driver. From the scene, Conlon reported to GEICO that there had been an accident damaging the car and it needed to be towed. He didn’t report at that time there had been any injuries.

On April 23, which was ten calendar days after the crash and seven days after GEICO assigned an adjuster to work the claim, it received a letter of representation from Pelaez’s attorney. On April 24, the very next day and only eleven days after the crash, GEICO decided to proactively tender to Pelaez its bodily injury policy limit of $50,000, even though it had not received a settlement demand from Pelaez’s attorney.

The next day, April 26, which was thirteen calendar days (nine business days) after the accident, a GEICO field adjuster hand delivered to Pelaez’s attorney’s office a bodily injury claim “tender package.” The package contained: a cover sheet that listed the package’s contents and described an enclosed check as “representing tender of the per person policy limit under Bodily Injury Liability coverage”; a $50,000 check inscribed with the notation “[t]ender of per person BI limits”; and a proposed form release of “all claims.”

In his letter rejecting the settlement offer, Pelaez’s attorney told GEICO that Pelaez and his parents had decided to sue Conlon and his mother instead of settling because GEICO had tried to take advantage of the Pelaez family with an overbroad release. He noted the “GEICO approved form release” was for “all claims” instead of just “the claims that [GEICO was] paying for” because it didn’t contain a “reservation for property damage,” despite GEICO’s sophistication and ability to draft narrower release language.

GEICO received the rejection letter the following Monday, May 7, and on May 8 told Conlon’s mother its efforts to settle with Pelaez had been unsuccessful. On May 9 GEICO responded to the rejection letter, expressing confusion about why the Pelaez family and their attorney thought its tender of the $50,000 bodily injury policy limit also included the property damage claim when the company had “made multiple attempts” by phone and in writing “to ascertain the location” of Pelaez’s motorcycle so that it could estimate the damage and adjust that claim but had never “received a call back with the motorcycle’s location” or even any acknowledgement of its “communication attempts.”

Five months after the crash the Pelaez family sued Conlon and his mother. A month after that, Pelaez and GEICO agreed to settle the property damage claim for $7,283.06. Three-and-a-half years later, while the negligence litigation was ongoing, GEICO declined to enter a stipulated judgment with the Pelaez family, Conlon, and Conlon’s mother.

Nearly two years after that, on the fifth day of the negligence trial involving the collision, the court entered a final judgment that Pelaez and Conlon had consented to. The judgment awarded Pelaez $14,900, 000 against Conlon but stipulated that Pelaez “shall not” record the judgment or try to collect it from Conlon; instead, Pelaez would “seek satisfaction . . . solely from insurance proceeds, including from claims of ‘bad faith’ or extra-contractual damages.”

Pelaez and Conlon then sued GEICO and both sides eventually moved for summary judgment. The district court granted it to GEICO on two grounds, one of which was that no reasonable jury could conclude GEICO had acted in bad faith.

ANALYSIS

An insurer, in handling the defense of claims against its insured, has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business.  Florida’s bad faith law is designed to protect insureds who have paid their premiums and who have fulfilled their contractual obligations by cooperating fully with the insurer in the resolution of claims.

Where “liability is clear, and injuries so serious that a judgment in excess of the policy limits is likely, an insurer has an affirmative duty to initiate settlement negotiations. The focus in a bad faith case is not on the actions of the claimant but rather on those of the insurer in fulfilling its obligations to the insured. For that reason, a claimant’s actions cannot let the insurer off the hook when the evidence clearly establishes that the insurer acted in bad faith in handling the insured’s claim.

Not only did GEICO never require an overbroad release to settle but it offered to accept changes to the release or even let Pelaez’s attorney draft an entirely new one himself.

The district court agreed with GEICO that the overbroad release did not create a fact question under the totality of the circumstances of this case, and we agree with the well-reasoned holding of the district court. As the district court convincingly explained, what came before and after GEICO sent Pelaez’s attorney the overbroad release demonstrates that the company fulfilled its duty to act in good faith.

On behalf of the Pelaez family, their attorney rejected the tendered $50,000 check to settle the bodily injury claim, a check that was inscribed “Tender of per person BI limits.” And the check had come in a settlement package that included a cover sheet describing it as “representing tender of the per person policy limit under Bodily Injury Liability coverage.” Despite the fact that the settlement package emphasized that the language of the release was simply proposed, not insisted on, and told Pelaez’s attorney to feel free to send the company “any suggested changes, additions or deletions” he wanted or, if he preferred, to draft an entirely new release himself.

What the before, during, and after facts show here is that, as the district court aptly concluded, GEICO did not act in bad faith in sending the unsolicited proposed release with the tender of the $50,000 BI policy limits under the circumstances of this case. In this case GEICO not only offered to change any problematic language but to let Pelaez’s attorney re-draft the release if he preferred. It would have been a simple thing for the attorney to do, but it is also the last thing he wanted to do.

Pelaez’s attorney declined the offer to cure any problem with the release because he had higher goals to pursue. Pelaez’s attorney described what he saw as GEICO’s “taking advantage of people” using overbroad releases as “just wrong” and said his decision not to tell GEICO what he wanted in the release came from the Pelaez family’s desire “to effectuate change, do the right thing.” The wellbeing of humankind was the reason he and his clients rejected GEICO’s efforts to settle. Okay, but that does not establish that GEICO acted in bad faith.

The conduct of Pelaez and his attorney’s show how, in the totality of these circumstances, GEICO did fulfill its good faith duty to Conlon and his mother. They show how the failure to settle the lawsuit against the insureds did not result from bad faith of the insurer.

Because no reasonable jury could conclude that GEICO acted in bad faith before, during, or after sending the proposed release to Pelaez, summary judgment was appropriately entered for it.

ZALMA OPINION

This is a clear case of abuse of the tort of bad faith by a plaintiff and the plaintiff’s lawyer who attempted to create a bad faith action by claiming he was not acting for his client but for the world of people with claims against GEICO insureds. GEICO did everything it could to protect its insured, delivered a check for its full limits less than a month after the accident and offered to pay the property damage after counsel let GEICO see the damaged motorcycle, was an act of bad faith. Because of the conduct of counsel GEICO paid to defend its insured and was obviously damaged by the bad faith conduct of the plaintiff and its counsel. Such conduct should be punished but the tort of bad faith only goes in one direction.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Evidence Needed to Prove Fraud

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A Video Explaining the Need to Gather Evidence to Prove Fraud

See the full video at https://www.rumble.com/zalma and at https://youtu.be/nC6qi-AtCe4

Evidence is broken into two major categories: direct and circumstantial.

Direct Evidence

Direct evidence is proof that tends to show existence of a fact in question without the intervention of the proof of any fact.  It includes testimony that tends to prove or disprove a fact in issue directly, such as eye-witness testimony or a confession.

Sometimes, direct evidence may not exist because records have been destroyed in a fire, destroyed by water, stolen, discarded, or eaten by vermin.

If direct evidence does not exist for any reason, circumstantial evidence must be produced to prove the fraud.

Circumstantial Evidence

Circumstantial evidence is all evidence of an indirect nature when the existence of the principal fact is deduced from evidentiary facts by a process of probability reasoning.  The investigator takes circumstantial evidence and uses deductive reasoning to reach a conclusion.  Circumstantial evidence and the deductions of a professional investigator are often more reliable than direct evidence like eye-witness testimony.  Circumstantial evidence is sufficient to establish proof of arson and other criminal activities.

Clear and Convincing Evidence

The “clear and convincing” standard is a very difficult and stringent standard to establish.  In New Jersey, in the case of Italian Fisherman, Inc. v. Commercial Union, 215 N.J. Super. 278, 521 A. 2d 912 (1987), the court refused to accept the clear and convincing evidence standard of proof proposed by the plaintiff in an insurance fraud defense, pointing out that proof of fraud by a preponderance of the evidence (50 percent plus one, which is much easier to establish than the “clear and convincing evidence” standard) renders the insurance policy void from its inception.

Preponderance of Evidence

An insurer need only prove arson by a preponderance of the evidence. In our view the defense of arson against a fire insurance claim is established if it is proved by a preponderance of the evidence.

Scienter

In fraud cases, where intent, knowledge, and scienter (evil intent or guilty knowledge) constitute essential elements of the offense, evidence of similar frauds and misrepresentations is admissible at trial. The insurer need only demonstrate the facts elicited during an investigation that support the founded belief that a fraud was attempted. Circumstantial evidence is sufficient to prove such facts if a party’s conduct may be reasonably inferred based upon logical inferences to be drawn from the evidence.

ZALMA OPINION

It is absolutely necessary that every person involved in the insurance claims profession understand the evidence that is needed to prove fraud so that they can evaluate whether or not to deal with an attempted fraud.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Even When Insured Fails to Defend Suit It is Difficult to Obtain Judgment

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Hard Work Pays and Default Judgment Entered for Failure to Pay Additional Premium

Starr Underwriting Agency, Inc., (“Starr”), sued S A S Services Group, Inc. (“S A S”) alleging one claim for breach of contract for failure to pay additional premium on Workers’ Compensation Premium after audit. In Starr Underwriting Agency, Inc. v. S A S Services Group, Inc., No. 2:21-cv-02622-CAS(JPRx), United States District Court, C.D. California (September 20, 2021).

INTRODUCTION

S A S was served with the operative complaint and a copy of the summons by personal service (“Proof of Service”) was submitted to the court. Defendant S A S did not answer nor otherwise respond to plaintiffs complaint.

Thereafter Starr requested the Clerk of Court to enter default against S A S. The Clerk entered default.

Starr, thereafter, filed a motion for default judgment by the Court. Starr served S A S and filed a notice of non-opposition to the plaintiffs motion for default judgment by the Court.

BACKGROUND

Starr is an insurance agency that acts as the servicer for Pacific Indemnity Company on certain insurance policies. Starr alleged that S A S is incorporated in the State of California with its principal place of business in El Segundo, California. Starr alleged that at the request of defendant S A S, Starr issued a workers’ compensation policy, (“WC policy”) which covered the time period from January 15, 2018 to January 15, 2019. The WC policy is an insurance contract in which Starr, as the servicer for Pacific Indemnity, provides insurance coverage for S A S in exchange for payment of premiums.

The estimated payroll for the WC policy term was $11,551,500.00. Starr performed an audit of S A S’s books as related to the WC policy. Based on the results of the audit’s findings, Starr revised the audit of the WC policy and determined the actual payroll was $19,683,797.00. The difference between the estimated and actual payroll led to an increase in the insurance premium and surcharges of $349,123.00 ($9,689.00 state surcharges plus $339,443.00 premium). Payment of the revised audit was due no later than October 31, 2020. Defendant has failed to remit payment of the balance owed to plaintiff pursuant to the terms of the WC policy.

DISCUSSION

Starr has satisfied the procedural requirement for entry of default judgment under the Federal and Local Rules, and the Court proceeds to the merits of its motion.

Risk of Prejudice to Plaintiff

S A S has not participated in the action to date, and Starr will therefore be prejudiced if default judgment is not entered in its favor.

Sufficiency of the Complaint and the Likelihood of Success on the Merits

For the purposes of default judgment, all well-pleaded allegations in the complaint, except those relating to damages, are assumed to be true. To prevail on a claim for breach of contract under California law, a plaintiff must establish:

  1. the existence of the contract,
  2. plaintiffs performance or excuse for nonperformance,
  3. defendant’s breach, and
  4. the resulting damages to the plaintiff.

Plaintiff sufficiently alleged the elements of a breach of contract claim. Moreover, plaintiff alleges that it has fulfilled its contractual obligations by providing insurance coverage afforded by the WC policy. By providing insurance to S A S, plaintiff had demonstrated performance under the contract. Finally, by failing to remit payment of the cost of the final premium based on the results of the audit, defendant has breached the contract. Plaintiff alleged that S A S’s breach has caused plaintiff to suffer damages including a balance owed on the WC policy of $349,132.00.

Sum of Money at Stake in the Action

If the sum of money at issue is reasonably proportionate to the harm caused by the defendant’s actions, then default judgment is warranted.

The total amount plaintiff seeks to recover is $377,145.62, plus post-judgment interest. The Court observed that the damages alleged by plaintiff are a straightforward computation of damages owed by defendant based on the contract. Therefore, the amount at stake appeared appropriate given the nature of the misconduct alleged.

Possibility of a Dispute Concerning a Material Fact

Starr filed a well-pleaded complaint alleging the facts necessary to establish its claims, and the court clerk entered default against S A S. Accordingly, no dispute has been raised regarding the material averment of the complaint, and the likelihood that any genuine issue may exist is, at best, remote.

Possibility of Excusable Neglect

Here, the possibility of excusable neglect is remote. Where a defendant is properly served with the Complaint, the notice of entry of default, as well as the papers in support of the instant motion, there is little possibility of excusable neglect.

Policy Favoring Decisions on the Merits

A party’s failure to answer or appear makes a decision on the merits impractical, if not impossible. Notwithstanding the strong policy presumption in favor of a decision on the merits, where a defendant’s failure to appear and respond makes a decision on the merits impractical, if not impossible, default judgment is appropriate. Thus, S A S’s failure to appear or otherwise respond makes a decision on the merits in this case impractical, if not impossible.

Relief Sought by Plaintiffs

The general rule of law is that upon default the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true. Moreover, the movant seeking default judgment must prove the damages sought, and although the Court may hold an evidentiary hearing to determine the amount of damages, no hearing is necessary if the amount of damages can be determined from definite figures contained in the documentary evidence or in detailed affidavits.

CONCLUSION

The Court granted plaintiffs motion for default judgment. The Court ordered that judgment be entered against defendant, and that defendant shall be liable to plaintiff in the amount of $349, 132.00 plus $465.67 in costs plus $27,547.95 in prejudgment interest, along with an additional $95.65 per day until default judgement is entered and post-judgment interest.

ZALMA OPINION

When a defendant fails to respond to a suit seeking damages he, she or it basically admits the allegations of the complaint. Courts, when asked to enter a judgment on default, even when it is as obvious was the failure of S A S to pay the premium it promised to pay when it acquired the workers’ compensation policy, are wary of default judgments. Starr, to collect, was required to jump through multiple hoops to get the demand of the complaint and the damages requested. S A S probably hoped it would be too difficult to get a judgment and saved the attorneys fees to fight a suit that it clearly owed. Insurers, like those represented by Starr should never allow a premium default to go by the wayside.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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The False Claims Act and Qui Tam Actions

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A Video Explaining the False Claims Act and How Insurers Can Take Advantage of it to Deter Fraud

See the full video at https://www.rumble.com/zalma and at https://youtu.be/J2UXvt64pRU

The False Claims Act, also known as the “Lincoln Law,” dates back to the Civil War. President Lincoln signed the act into law in 1863 because war profiteers were selling the Union Army shoddy supplies at inflated prices. The original law included qui tam [“Qui tam” is an abbreviation of the Latin phrase “qui tam pro domino rege quam pro si ipso in hac parte sequitur” meaning “Who sues on behalf of the King as well as for himself.”  There are a number of pronunciations of the Latin abbreviation qui tam.  The simplest is key tam (rhymes with “ham.”) Black’s Law Dictionary suggests kweye (rhymes with “eye”) tam.provisions that allowed a private person (plaintiff) to sue those who defrauded the federal government. If the suit was successful the plaintiff would receive 50% of any recovery from the defendant.]

The qui tam provisions were weakened greatly as a result of congressional amendments in 1943, and qui tam legislation became virtually nonexistent. However, in 1986, Sen. Charles Grassley, R–Iowa, and Rep. Howard Berman, D Calif., joined forces to amend the law and strengthen the incentives for citizens to uncover and fight fraud as qui tam relators. (Relators are the private plaintiffs under the False Claims Act).

The 1986 False Claims Act amendments received widespread bi-partisan support, and were signed into law by President Reagan. Since the revitalization, the qui tam provisions have increasingly been used.

If the government does intervene, it assumes primary responsibility for the prosecution of the case, and is not bound by any act of the relator. 31 U.S.C. § 3730(c)(1). The relator remains as a party to the action, however, subject to certain limitations set forth in the Act. Id. Specifically, the government may dismiss the action notwithstanding the objections of the relator, provided, however, that “the person has been notified by the Government of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion.” [31 U.S.C. § 3730(c)(2)(A).; U.S. ex rel. Atkins v. EEOC, 1993 U.S. Dist. LEXIS 21268.]

Since the qui tam provisions were added to the Act in 1986, the US Department of Justice calculates that the government has recovered more than $1.09 billion in qui tam cases, with whistleblowers receiving nearly 18% (or $184 million) of the government’s recovery. When considering a qui tam action be certain, however, that the authorizing statute authorizes the action.

ZALMA OPINION

Insurance fraud is ever growing with estimates from $80 billion to $300 billion a year. The Qui Tam suit is a method to deter insurance fraud by hitting the fraud perpetrator in the pocket book and deter the crime when the state or federal government refuses to file criminal actions.

 


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Insurers Beware: A Chink in the Armor of New York v. Sullivan

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Actual Malice in Republication of Defamation by Implication

Devin Nunes, a Member of Congress from California, appealed an order of the district court dismissing his complaint alleging defamation and conspiracy claims against Ryan Lizza and Hearst Magazine Media, Inc. The claims are based on an article published in Esquire magazine and republished after suit was filed claiming the article was false and defamatory. In Devin G. Nunes v. Ryan Lizza, Hearst Magazine Media, Inc., No. 20-2710, United States Court of Appeals, Eighth Circuit (September 15, 2021) Nunes established the complaint sufficiently alleged defamation by implication and that the defamation was actually malicious.

FACTS

Representative Nunes has been a Member of Congress since 2003. He worked on his family’s farm in California as a child, and later owned farmland with his brother. In 2006, the Nunes family sold its farmland in California, and the Congressman’s parents and brother moved to Sibley, Iowa, where his father purchased a dairy farm, NuStar Farms. According to the complaint, the farm is operated by the Congressman’s family without his involvement, and the Congressman has no financial interest in the farm.

On September 30, 2018, Esquire magazine (then owned by Hearst) published an article about Representative Nunes and the farm. Lizza authored the piece. The online version is entitled “Devin Nunes’s Family Farm Is Hiding a Politically Explosive Secret.” The print version is entitled “Milking the System,” and includes a caption that asks two questions about a Congressman who has “spun himself as a straight talker whose no-BS values are rooted in his family’s California dairy farm”: “So why did his parents and brother cover their tracks after quietly moving the farm to Iowa? Are they hiding something politically explosive?”

The article maintains that Representative Nunes and his family hid the fact that the family farm is now in Iowa and declares it “strange . . . that the family has apparently tried to conceal the move from the public-for more than a decade.”

The article later asserts that the farm uses undocumented labor: “According to two sources with firsthand knowledge, NuStar did indeed rely, at least in part, on undocumented labor. One source . . . had personally sent undocumented workers to Anthony Nunes Jr.’s farm for jobs” and “assert[ed] that the farm was aware of their status.”

Two statements insinuate that the farm’s use of undocumented labor is the reason that Representative Nunes and his family were hiding the family’s move and their operation of an Iowa dairy farm. The article also accuses Representative Nunes of improper conduct during his tenure as Chairman of the House Intelligence Committee. The article says that he used his chairmanship (1) “to spin a baroque theory about alleged surveillance of the Trump campaign that began with a made-up Trump tweet about how ‘Obama had my “wires tapped” in Trump Tower, ‘” and (2) as a “battering ram to discredit the Russia investigation and protect Donald Trump at all costs, even if it means shredding his own reputation and the independence of the historically nonpartisan committee in the process.”

After the article was published, Nunes sued Lizza and Hearst in the district court, alleging common-law defamation and conspiracy. The complaint, as amended, claims express defamation based on eleven alleged false statements in the article, and defamation by implication. The alleged defamatory implication is that the article implies falsely that Representative Nunes “conspired or colluded with his family and with others to hide or cover-up” that the farm “employs undocumented labor.”

The trial court dismissed the complaint and Nunes appealed the dismissal. Nunes contended that his complaint states a claim for express defamation and defamation by implication. Defamation is an invasion of the interest in reputation and good name that is comprised of the twin torts of libel and slander-the former being written and the latter being oral. Nunes’s complaint sounds in libel.

Because Representative Nunes is a public figure, the Supreme Court’s jurisprudence on the First Amendment also requires him to prove by clear and convincing evidence that the defamatory statement is false and was made with actual malice. [Harte-Hanks Commc’ns, Inc. v. Connaughton, 491 U.S. 657, 659 (1989); N.Y. Times Co. v. Sullivan, 376 U.S. 254, 279-80 (1964).]

A claim asserting defamation by implication requires proof of similar elements, except that a plaintiff need not show that individual statements are defamatory. The implication constitutes defamation even though the particular facts are correct, unless it qualifies as an “opinion.”

The Eighth Circuit agreed with the district court that the complaint fails to state a claim for express defamation based on the statements, and adopted the court’s conclusions. Nunes contended that his complaint states a plausible claim for defamation by implication. It is well settled that the arrangement and phrasing of apparently nonlibelous statements cannot hide the existence of a defamatory meaning when a reader could reasonably arrive at the implication, the author may be accountable.

Here, the article’s principal theme is that Nunes and his family hid the farm’s move to Iowa-the politically explosive secret.

A conspiracy is an agreement that requires knowledge-here, knowledge that the farm employed undocumented labor-and a knowing agreement to cover up that politically embarrassing fact. Whether Nunes knew about the farm’s hiring practices, including the potential use of undocumented labor, and whether he agreed with others to keep that information secret, are issues of verifiable fact. The implication is “sufficiently factual to be susceptible of being proved true or false,” so it is not a protected opinion.

To demonstrate that a defendant intended subjectively an implication, it is sufficient to show that the particular manner or language in which the true facts are conveyed, supplies affirmative evidence suggesting that the defendant intends or endorses the defamatory inference. The Eighth Circuit found that Nunes plausibly alleged that Lizza and Hearst intended or endorsed the implication that Nunes conspired to cover up the farm’s use of undocumented labor.

The next issue for consideration is “actual malice.” The Supreme Court’s interpretation of the First Amendment requires a public official to prove that defamatory statements or implications are made with “actual malice,” meaning with knowledge that it was false or with reckless disregard of whether it was false or not.. In this context, reckless conduct is not measured by whether a reasonably prudent man would have published. Instead, the defendant must have made the false publication with a high degree of awareness of probable falsity, or must have entertained serious doubts as to the truth of his publication.

Under the demanding standard set by the New York Times case, the Eighth Circuit agreed with the district court that the complaint is insufficient to state a claim of actual malice as to the original publication.

There is a distinction in defamation law between an original publication and a republication. In that situation, the publication reaches a new group and the repetition justifies a new cause of action. The justification for this exception to the “single publication” rule is that the subsequent publication is intended to and actually reaches a new audience. A speaker who repeats a defamatory statement or implication after being informed of its falsity “does so at the peril of generating an inference of actual malice.” Bertrand v. Mullin, 846 N.W.2d 884, 901 (Iowa 2014). Once the publisher knows that the story is erroneous the argument for weighting the scales on the side of its first amendment interests becomes less compelling.

Nunes’s initial complaint was filed on September 30, 2019. The complaint denied that Nunes had any involvement in the farm’s “operations,” denied that there was a “secret” involving the farm’s move to Iowa and his alleged hypocrisy on immigration policy, and denied that he “was involved in, covered-up, . . . conspired with others to conceal, or was aware of criminal wrongdoing.”

Nonetheless, on November 20, 2019, Lizza posted a tweet with a link to the article. The complaint plausibly alleges that the article defames Nunes by implication. The complaint  adequately alleges that Lizza intended to reach and actually reached a new audience by publishing a tweet about Nunes and a link to the article. In November 2019, Lizza was on notice of the article’s alleged defamatory implication by virtue of this lawsuit. Under those circumstances, the complaint sufficiently alleges that Lizza republished the article after he knew that the Congressman denied knowledge of undocumented labor on the farm or participation in any conspiracy to hide it.

Republication of a statement after the defendant has been notified that the plaintiff contends that it is false and defamatory may be treated as evidence of reckless disregard.  The Eighth Circuit remanded for further proceedings on Nunes’s claim alleging defamation by implication, and the related claim alleging a common-law conspiracy, as to the publication of November 20, 2019.

ZALMA OPINION

Insurers who insure against defamation and have relied on the “actual malice” requirement of defamation of a public figure, should read this decision with care. Although the Eighth Circuit refused to reconsider New York Times v. Sullivan it found actual malice in the republication and allows Nunes to go forward with his suit against Lizza and Hearst. Their insurers will be required to defend through trial and may find a claim for payment of damages. The issue may also reach the Supreme Court where some justices have discussed the need to reconsider the New York Times v. Sullilvan case.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

 

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Retaining an Attorney by a Claims Person

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A Video About Selecting and Working With Counsel

See the full video at https://www.rumble.com/zalma and https://youtu.be/dTu6XuH6vHs

In instances where insurance claims may entail litigation, insurers must move quickly to engage counsel. When an attorney is retained to defend a person insured, the fact should be documented in writing by the attorney, the adjuster, and the insured who is to be defended.

Before an insurer retains an attorney to represent an insured to defend an insured who has been sued for a tort the claims person should be certain the lawyer is competent to defend the insured. This can be accomplished by attending a trial conducted by the lawyer where the claims person can evaluate the lawyer’s competence at trial. If that option is not available the claims person should seek recommendations from other insurance claims professionals who have retained the lawyer in the past or the insurance company’s list of approved defense lawyers who have been evaluated by the insurer’s management.

If the attorney is being retained for the first time by the insurer, the insurer should obtain an engagement letter from the attorney setting forth the terms and conditions of the retention and signed by the attorney, the claims person, and the insured. If the attorney or law firm has an ongoing relationship with the insurer, only the person being defended need sign an engagement letter.

The claims person must understand that an engagement letter is an effective contract between the lawyer and the insurer. As a matter of law, there could not have been an implied contract between Plaintiffs and Gulley, personally. Because the Court has decided the implied contract issue as a matter of law based on undisputed facts, the issue of whether there is a factual dispute regarding the existence of an implied contract is moot. Like an insurance policy a lawyer’s engagement letter will be read as written if there is no ambiguity.

Whenever an insured is sued and requires a defense or the insurer is sued, the insurance adjuster and the defense attorney must understand their respective roles in preparing the case for trial. They must develop a rapport with each other and with the insured person or entity that is being defended, to make communication easier to maintain. Bad faith lawsuits and poorly tried bodily injury cases seem to arise when the adjuster and the defense attorney fail to communicate regularly with each other and the policy holder.

At the first meeting, the attorney and the adjuster should agree on the division of labor with regard to the preparation of the case, according to their respective training and experience. Counsel and the claims person should reach an agreement regarding the handling of the case.

ZALMA OPINION

How to effectively retain a lawyer is important to everyone. It is essential to an insurance claims person who is called upon to retain a lawyer to represent the interests of a person or entity insured.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Man Bites Dog Story: State Farm Sues Chiropractors for Fraudulent Claims

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Insurers Frustrated by Lack of Prosecution for Insurance Fraud Proactively Sue Chiropractors they Claim Defrauded the Insurers

Insurers, victims of insurance fraud, see little or no prosecution of those who defraud them. State Farm, not willing to wait, proactively sued defendants James Marshall, D.C. and Marshall Chiropractic, LLC (collectively “Defendants”) for fraud. After discovery was completed the Chiropractors moved for summary judgment seeking dismissal of State Farm’s suit. In State Farm Guaranty Insurance Company, and State Farm Indemnity Company v. Marshall Chiropractic, LLC and James Marshall, D.C., Civil Action No. 20-1918 (MAH), United States District Court, D. New Jersey (September 17, 2021) the USDC was asked to dismiss because State Farm failed to file an  affidavit of Merit asserted against the chiropractors required of malpractice suits against health care providers. State Farm did not allege malpractice.

BACKGROUND

Plaintiffs are auto insurers who provide personal injury payment (“PIP”) coverage to their insureds. Defendant Marshall is a chiropractor licensed in the State of New Jersey and the owner of Defendant Marshall Chiropractic.

Plaintiffs sued the chiropractors asserting four causes of action: common law fraud; breach of the New Jersey Insurance Fraud Prevention Act; unjust enrichment; and declaratory relief. According to the Complaint, Defendants fraudulently acquired PIP payments from Plaintiffs by imposing a predetermined treatment protocol and subjecting State Farm-insured patients to “virtually the same laundry list of services on nearly every visit, ” rather than conducting an individualized assessment and creating a personalized treatment plan. Plaintiffs demanded reimbursement for PIP-benefit payments totaling “approximately $850,000.” They also sought treble damages, costs, and declaratory relief as redress for Defendants’ alleged misconduct.

Fifteen months after the initiation of the suit and over twelve months after filing their Answer, Defendants moved for summary judgment. They assert for the first time that Plaintiffs were required to file an affidavit of merit under New Jersey statutes.

DISCUSSION

Application of the New Jersey Affidavit of Merit Statute

Defendants argued that Plaintiffs were required to comply with the New Jersey Affidavit of Merit Statute because the Complaint contains allegations that Defendants “breach[ed] the applicable standard of care owed . . . to their patients in providing medical services.” Plaintiffs responded that their claims are outside the statute’s scope because they are not pursuing personal injury, wrongful death, or property damages, and they have not filed an action for malpractice or negligence.

The failure to provide an appropriate affidavit or a statement in lieu thereof shall be deemed a failure to state a cause of action and ordinarily requires dismissal of the complaint with prejudice. However, plaintiffs have not filed an action for malpractice or negligence.  The USDC concluded that claims seeking to recoup a finite sum previously paid, does not fall within the Affidavit of Merit Statute.

In this case, Plaintiffs sought to recover a sum that is substantially certain. Specifically, Plaintiffs seek the return of “more than $850,000 in PIP benefits” paid because of Defendants’ alleged scheme. Although Plaintiffs relatedly seek treble damages, declaratory relief, and costs, those potential damages do not change the Court’s analysis. The demands for repayment do not hinge upon a showing that Defendants committed professional malpractice. Accordingly, Plaintiffs’ allegations do not trigger the Affidavit of Merit Statute.

Defendants’ motion for summary judgment was denied.

ZALMA OPINION

State Farm, and other insurers, that proactively sue the persons and entities they believe are defrauding them have found that taking money from fraudsters is more effective than the rare prosecution by the state of the fraud perpetrators. As victims of fraud any insurer has the right to be indemnified from the fraudsters and, more importantly, take the profit out of the crime. Waiting for a state prosecutor – especially with some state prosecutors who are averse to even prosecuting serious criminal activities like assault, battery, and murder, it is time that all insurers – if their SIU develops evidence that they are being defrauded – should proactively file for damages under the state fraud statutes and the federal RICO statutes.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Evaluation and Settlement of Liability Claim

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A Video Explaining Evaluation & Settlement

See the full video at https://youtu.be/OV06h8SdKIU and at https://www.rumble.com/zalma

Case evaluation is necessary to the efficient operation of a third party liability claims department.

The evaluation should be completed as soon as reasonably practical after the completion of a thorough investigation. A quick resolution and payment of the claim will result in a lower amount of settlement with the claimant and lower expenses incurred by the insurer.

It should be the goal of every claims adjuster to pay the deserving claimant every dollar owed as soon as possible. This goal should be tempered by the need to preserve the assets of the insurer and the insured. It is axiomatic that a liability claim can be settled for less before suit is filed than after.

Settlement is favored by the law, and by insurers, claimants, and insureds. Every effort should be made to resolve the claim before litigation begins.

The adjuster must learn to quantify these damages in order to reasonably evaluate the exposure faced by the insured and, simultaneously, the insurer. Sources to help quantify this type of subjective damages include:

  • jury verdict research (publishers provide the adjuster with the historical and current values juries put on the same type of injury in the same jurisdiction);
  • the records of the insurer on the amounts paid to settle similar claims in the same jurisdiction;
  • the experience of the individual adjuster: his or her knowledge of the amounts needed to settle claims in his or her location; and
  • the experience of the mediator or settlement conference judge.

ZALMA OPINION

Every liability claims adjuster, defense lawyer and plaintiffs’ lawyer must understand how to evaluate a third party liability claim for bodily injuries or property damage or both is essential to the resolution of such claims and litigation. This video will help the professional to work to reach the careful evaluation and prompt resolution of liability claims.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Business Use Exclusion Is Reasonable and Common in a Homeowners Policy

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Warranty Statute Does Not Apply to an Exclusion

Steven Kutchera bought a homeowners policy from defendant State Farm Fire and Casualty Company. In 2020, Kutchera submitted a claim to State Farm under that policy, alleging that his garage collapsed because of the weight of ice and snow on the roof. State Farm denied the claim on the ground that Kutchera had been using the garage for business purposes, so it was excluded from coverage. In Steven Kutchera v. State Farm Fire And Casualty Company, No. 20-cv-930-jdp, United States District Court, W.D. Wisconsin (September 15, 2021) the USDC was asked to make an exclusion a warranty or an exclusion.

BACKGROUND

Kutchera concedes that he was using his garage to repair cars for money during the relevant policy period. But he contends that the damage to his garage was unrelated to any car repair work that he was doing, so State Farm was prohibited from denying coverage under Wis.Stat. § 631.11(3), which applies when there is “a failure of a condition” or a “breach of a promissory warranty.” State Farm contends that the business-use clause is an exclusion, not a warranty or a condition, so § 631.11(3) doesn’t apply.

Kutchera asserts claims for breach of contract, bad faith, and a violation of Wis.Stat. § 628.46 for untimely payment of an insurance claim. Both Kutchera and State Farm moved for summary judgement.

Kutchera purchased a homeowner’s policy with an off-premises structures endorsement, which would afford coverage for the garage. Kutchera began running an automobile service center out of the garage. He contacted State Farm to buy an insurance policy for the garage, but State Farm told him that it didn’t provide insurance for “automotive-type repair.” So Kutchera bought a business policy for “Kutchera LLC” from another insurance company, with an annual premium of $2,590.

Later, Kutchera cancelled his business policy. He contacted State Farm again, stating that he had “basically closed” the service center and needed insurance on the garage for “personal use.” His homeowner’s policy still included an off-premises structures endorsement, so no additional policy was needed.

State Farm’s homeowner’s policy included an off-premises structures endorsement with the following language: “This coverage does not apply to any structure: … (4) used either completely or in part for business purposes; …”

In January 2020, Kutchera reported to State Farm that the roof on his garage had collapsed as a result of the weight of accumulated ice and snow. A claim adjuster visited the garage and observed that there was a hydraulic car lift inside. But Kutchera told the adjuster that he closed the garage in 2017. State Farm later obtained tax records, invoices, and other records from Kutchera showing that he was still doing business out of the garage in 2018 and 2019. His ledger showed $22,179 in gross receipts for 2019, and most of that amount was for dates during the policy period. In May 2020, State Farm denied Kutchera’s claim because its investigation had revealed business use of the garage.

ANALYSIS

The portion of the policy at issue in this case is an endorsement for “other structures.” The endorsement includes the following clause: “This coverage does not apply to any structure . . . used either completely or in part for business purposes.”

The statute provides that is the basis of Kutchera’s argument states: “No failure of a condition prior to a loss and no breach of a promissory warranty constitutes grounds for rescission of, or affects an insurer’s obligations under, an insurance policy unless it exists at the time of the loss and either increases the risk at the time of the loss or contributes to the loss.”

The question presented to the court was whether the clause is a “condition” or a “promissory warranty” within the meaning of the statute, as Kutchera contends, or simply an exclusion, as State Farm contends.

The clause at issue is written as an exclusion: it states that the policy “does not apply” to structures used for business purposes.

There is little case law interpreting § 631.11(3), and the Wisconsin Supreme Court has indicated that the meaning of the terms hasn’t changed and is the same as their common-law meaning. In an insurance policy, an exclusion is a provision which eliminates coverage where, were it not for the exclusion, coverage would have existed. An exclusion limits the scope of coverage provided by the policy in the first place.

A promissory warranty is a statement made by the insured, which is susceptible of no construction other than that the parties mutually intended that the policy should not be binding unless such statement be literally true. It is clear that the clause relating to business use isn’t a statement by Kutchera that he won’t use his garage for business use. Rather, the clause is framed as an exclusion because it limits the scope of coverage takes out events otherwise included within the defined scope of coverage, and expressly refuses to assume a specific hazard or risk, namely a structure used for business purposes.

Black’s Law Dictionary says: “A warranty that facts will continue to be as stated throughout the policy period, such that a failure of the warranty provides the insurer with a defense to a claim under the policy.” That definition is consistent with and supports State Farm’s view. A business-pursuits exclusion, such as the one in this case, is a common exception to the broad coverage provided in homeowners and general liability insurance policies.

Kutchera’s position, if adopted by the court, would significantly change the law on business-use exclusions, requiring insurers in each instance to prove that the loss was related to the business use. In a situation like Kutchera’s, involving a structure that had both personal and business uses, determining which use contributed to the loss could turn into an expensive and time-consuming investigation.

Taken to its logical conclusion, Kutchera’s view would permit an insured to use a homeowner’s insurance policy to obtain coverage for a structure that was used entirely for business purposes, so long as any damage to the property was unrelated to the business use, such as a tree falling on the structure.

The USDC noted that Kutchera raised interesting questions but his view isn’t supported by Wisconsin law and would significantly change the scope and application of business-use exclusions in Wisconsin. Therefore, the court granted State Farm’s motion for summary judgment on the breach-of-contract claim. As for Kutchera’s other claims, both are contingent on the success of his breach-of-contract claim. A bad-faith claim requires the plaintiff to show that there is no reasonable basis for the insurer to deny the insured’s claim for benefits under the policy.

The court granted State Farm’s motion for summary judgment and denied Kutchera’s. The clause at issue is written as an exclusion, not a warranty or a condition. Kutchera’s other arguments challenging the scope and validity of the business-use clause also fail. Accordingly, State Farm is entitled to summary judgment on the breach-of-contract claim. Kutchera’s other claims are contingent on the success of his contract claim, so those claims fail as well.

ZALMA OPINION

Kutchera knew exactly what he was doing. He had purchased business insurance to cover the garage and paid a hefty premium for the coverage. He cancelled that policy and told State Farm that he had stopped doing business at the garage. In so doing he misrepresented the use of the garage to State Farm who discovered the lies during its investigation. Because there was clearly no coverage Kutchera tried to use a statute to make coverage that didn’t exist. He should have told the truth and kept the business coverage.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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Some Appellate Cases Establishing the Tort of Bad Faith

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A Video About the Birth & Growth of the Tort of Bad Faith

See the full video at https://rumble.com/zalma and at https://youtu.be/RMk_et9UDZ4

Fletcher v. Western Life

In Fletcher v. Western Life Ins. Co., 10 Cal. App. 3d 376, 89 Cal. Rptr. 78 (1970), the plaintiff, Fletcher was, at the time of trial, a 41-year-old father of 8 children, seven of whom were still in school.

Defendants’ conduct was premeditated, continuous and persistent (citation) and defendant Amason, who was still employed as Western National’s claims manager at the time of trial, indicated that he would conduct himself similarly if a similar situation should again arise. The primary function of punitive damages is to deter the defendant and those similarly situated from engaging in similar tortuous conduct in the future.

Gruenberg v. Aetna

It is manifest that a common legal principal underlies all of the foregoing decisions; namely, that in every insurance contract there is an implied covenant of good faith and fair dealing. The duty to so act is imminent in the contract whether the company is attending to the claims of third persons against the insured or the claims of the insured itself. Accordingly, when the insurer unreasonably and in bad faith withholds payment of the claim of its insured, it is subject to liability in tort.

“We conclude, therefore, that the duty of good faith and fair dealing on the part of defendant insurance companies is an absolute one. At the same time, we do not say that the parties cannot define, by the terms of the contract, their respective obligations and duties. We say merely that no matter how those duties are stated, the nonperformance by one party of its contractual duties cannot excuse a breach of the duty of good faith and fair dealing by the other party while the contract between them is in effect and not rescinded.”

Silverg v. California Life

under these circumstances defendant’s failure to afford relief to its insured against the very eventuality insured against by the policy amounts to a violation as a matter of law of its duty of good faith and fair dealing implied in every policy. 11 Cal. 3d at 462. (Emphasis added.)

ZALMA OPINION

An insurer should never leave the insured without benefits while it is involved in a dispute with another insurer or provider of benefits. It should, rather, protect its right to dispute coverage and get its money back by means of a reservation of rights letter or a non-waiver agreement. The reservation of rights letter keeps the insurer, while it is taking care of an insured whose coverage is in question, from being bound to the insured forever. It allows the insurer, unilaterally, to give itself the opportunity to complete a thorough investigation, determine whether coverage applies, and then—if it does not apply—withdraw its benefits and even seek return of what it has paid. The non-waiver agreement is a contract where both the insured and the insurer agree that while the insurer is investigating neither party waives the rights available under the contract.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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Cancellation Rule Requires Contradictory Evidence to be Ignored

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It’s Not Nice to Lie to Your Insurer

An insurance company sought a judgment that an automobile insurance policy issued to a mechanic does not provide coverage for an accident involving the mechanic. After examining the mechanic under oath, the insurance company moved for summary judgment, arguing that the policy contained a business purpose exclusion for accidents occurring while road testing a vehicle, which the mechanic stated he was doing at the time the accident occurred. In Tennessee Farmers Mutual Insurance Co. v. John A. Simmons et al., No. E2020-00791-COA-R3-CV, Court of Appeals of Tennessee, Knoxville (September 14, 2021) the insurer asked that the Court of Appeal reverse based on the cancellation rule.

FACTUAL BACKGROUND

John Arthur Simmons (“Simmons”) worked as a diesel mechanic specializing in repairing vehicles and farming equipment that run on diesel engines. Jeremy Shipley (“Shipley”) brought his 2005 Ford F-250 diesel pick-up truck to Simmons for repairs after the truck’s oil pressure warning light came on. Three days later, on June 2, 2017, Simmons was involved in an automobile accident while driving Shipley’s truck (“the Accident”).

Celeste Miller and her husband, Robert Miller, sued Simmons, Shipley, and Shipley’s wife, Stephanie Shipley, seeking compensation for personal injuries and property damage, alleging that Simmons negligently rear-ended the vehicle driven by Mrs. Miller while operating the truck for the purpose of “mechanical evaluation” with permission from the Shipleys.

Tennessee Farmers Mutual Insurance Company (“Farmers”) had issued an automobile insurance policy to Simmons that was in effect on the date of the Accident. The policy contained a “business purpose” exclusion, which states: “We do not provide liability coverage . . . for any person or entity while employed or otherwise engaged in the business or occupation of selling, repairing, servicing, storing or parking vehicles designed for use mainly on public highways, including road testing and delivery.”

On March 16, 2018, after receiving notice of the lawsuit filed by the Millers, Farmers conducted an examination under oath (“EUO”) of Simmons as part of its investigation of the facts alleged by the Millers concerning the Accident. At the EUO Simmons and his wife both testified he was test driving the pickup to help in its repair.

Farmers filed a Complaint for Declaratory Judgment in the trial court, seeking a declaration that the policy it had issued to Simmons did not provide coverage for the Accident pursuant to the policy’s business purpose exclusion. Farmers asserted that Simmons’ statements during the EUO indicated that he was operating Shipley’s truck “while engaged in his business and/or occupation of repairing and/or servicing vehicles.” Simmons responded denying that he was road testing the truck at the time of the Accident. He asserted that he was “simply running personal errands” and that he had permission to use Shipley’s truck until “Shipley got back in town and could arrange to pick up his vehicle.”

The case was tried by a jury on March 9, 2020. Farmers called Shipley and Simmons to the witness stand; Simmons did not call any witnesses. Shipley testified he had taken his diesel truck to Simmons’ Diesel at least twice before the Accident because he “trusted him more than [he] would a dealership.” Shipley acknowledged that he would not have had a problem with Simmons driving the truck as part of repairing the vehicle. Simmons testified that Simmons’ Diesel has been a licensed business in Loudon County for over ten years. He testified that Shipley was a repeat customer and that he had Shipley’s truck on the date of the Accident only because Shipley had “brought it to be repaired.” Simmons disputed that Shipley did not give him permission to use the truck for personal errands. He said Shipley told him that the truck “had a full tank of fuel, if I needed to drive it or wanted to drive it, I could.”

Simmons admitted that when he was asked during the EUO if he was “test driving [the truck] or road testing it on June 2nd,” he answered in the affirmative. He also acknowledged that when Shipley said to drive the truck, Shipley was “wanting to see if there’s anything else wrong with it.”

The case was considered by the jury, which found that the policy’s automobile business exclusion did not exclude coverage for the Accident. On March 20, 2020, the trial court entered its judgment on the jury’s verdict and ordered Farmers to provide Simmons with coverage for the Accident.

Farmers moved for judgment in its favor notwithstanding the jury’s verdict because:

  1. that the trial court erred in failing to apply the cancellation rule and allowing Simmons to contradict his own prior sworn testimony;
  2. that the weight of the evidence preponderated against the jury’s verdict that the automobile business exclusion did not apply; and
  3. that the trial court erred in allowing Simmons to introduce evidence of an insurance agent’s potential fault when comparative fault had not been alleged as an affirmative defense.

The trial court denied Farmers’ motion. The trial court found that the weight of the evidence supported the verdict.

DISCUSSION

Under the cancellation rule, when a witness makes contradictory statements on the same question of fact, the statements cancel each other and, therefore, do not amount to evidence of the fact. The Tennessee Court of Appeal has observed that no sensible decision holds that a witness’s testimony on a fact is automatically discounted simply because the witness contradicted himself or herself on that fact. Rather, the court assesses whether there is an explanation for the inconsistency and whether either version is corroborated by other evidence.

The question is not one of the credibility of a witness or of the weight of evidence; but it is whether there is any evidence at all to prove the fact. If the proof of a fact lies wholly with one witness, and he both affirms and denies it, and there is no explanation, it cannot stand otherwise than unproven. It would be mere caprice in a jury upon such evidence to decide it either way.

Upon a careful review of the record, we find that Simmons’ statements are both contradictory and mutually exclusive. Simmons’ assertions at trial directly contradict his prior sworn statements during the EUO that he was “test driving [the truck] or road testing it to see if there were any other problems that might need to be addressed” because Shipley “wanted to make sure it was fixed.”

Before Farmers filed this declaratory action, Simmons had stated during the EUO that he was test driving the truck because Shipley wanted him to make certain it was fixed, and he never made any mention of running personal errands. At trial, Simmons added that the repair was completed on May 30, 2017, and that he was driving the truck at the time of the Accident to run personal errands. Given the circumstances and statements surrounding Simmons’ contradictory statements, the Court of Appeal concluded that Simmons’ competing accounts of the reason for using Shipley’s truck at the time of the Accident cannot be reconciled.

Therefore, the Court of Appeal concluded that the trial court should have applied the cancellation rule to Simmons’ testimony. When the rule is applied, the only remaining evidence supports but one conclusion: that Simmons was driving the truck for business purposes.

After applying the cancellation rule, the evidence in the record only supports the conclusion that Simmons was test driving the truck. Consequently, the trial court should have directed a verdict declaring that the automobile insurance policy Farmers issued to Simmons provides no coverage for the Accident pursuant to the policy’s business purpose exclusion. As a result the Court of Appeal remanded the case to the trial court for the entry of a verdict in favor of Tennessee Farmers Mutual Insurance Company.

ZALMA OPINION

The covenant of good faith and fair dealing requires that neither party do anything to deprive the other of the benefits of the contract. Simmons attempted to deprive Farmers of its right to exclude coverage while he was test driving the vehicle involved in the accident by changing his sworn testimony at trial from the sworn testimony at EUO. Since the two statements were contradictory they fell afoul of the cancellation rule and should have been ignored by the trial court and the jury. They were not and the judgment was reversed in favor of the insurer. What the court did not consider was that one of his sworn statements was false, sufficient grounds to deny the claim and void the policy.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

 

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How to Enforce Public Adjuster Ethics

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A Video Explaining the Need for Ethical Public Adjusters

See the full video at https://www.rumble.com/zalma at https://youtu.be/z91etOoeWYM

Public Adjusters are claims professionals who are employed exclusively by a policyholder who has sustained an insured first party property loss. The public adjuster handles every detail of the claim, working closely with the insured to provide the most equitable and prompt settlement possible.

The conduct of the public adjuster is governed, in most states, by statute. For example, the state of California uses the following statutes to regulate the business of a public insurance adjuster starting at §§ 15000 et seq of the Insurance Code and presented in full in Appendix 1. As a licensing statute, it attempts to require a public insurance adjuster to act ethically and in good faith on behalf of his or her client.

To perform the duties imposed upon a public adjuster to properly represent an insured should inspect the loss site immediately, analyze the damages, assemble claim support data, review the insured’s coverage, determine current replacement costs and exclusively serve the client, not the insurance company while working ethically with the insurer’s adjuster.

The National Association of Public Insurance Adjusters (NAPIA) publishes a code of conduct which sets forth the ethical standards that all public insurance adjusters should follow. It provides:

The public adjuster should not engage in the unauthorized practice of law, not engage in activities that may be construed as presenting a conflict of interest or obtaining a financial interest in salvaged property that is the subject of a claim, nor should the public adjuster use advertisements that violate the Insurance Code. The public adjuster must use contract forms that are approved by the commissioner.

An example of less than appropriate action by a public insurance adjuster and the lawyer who represented the same client, involved a claim for the 1994 Northridge earthquake that resulted in claims of multiple wrongful claims handling. The 1994 Northridge, California earthquake caused billions of dollars in damages across Southern California.

Zalma Opinion

Public adjusters perform an important service to busy professionals who simply do not have the time or skill to deal with a first party property claim. By agreeing to pay the public adjuster a portion of the claim payment the policyholder understands that after the fee is paid the payment by the insurer will not be enough to complete repair and will take the cost as an expense worthy to save the insured the time needed to deal with the insurer. An ethical public adjuster will resolve a claim quickly and fairly. An unethical public adjuster will not. It is imperative that state regulators enforce the requirement that public adjusters comply with state law and ethically work to resolve claims.


© 2021 – Barry Zalma

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 54 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. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma;  Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/  The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/  podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4

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