Not Every Reservation of Rights Raises a Conflict

Posted on September 11, 2013 03:11 by Barry Zalma

An insurer that reserves its rights under a policy of insurance will usually raise a request by the insured for independent counsel. However, unless the reservation actually raises the need for the application of the ethical duty of an attorney to avoid representing conflicting interests. If that duty exists independent counsel is required. If not, the insurer may assert its right to control the defense of the insured with counsel of its choice.

In Federal Insurance Company v. MBL, Inc., H036296, H036578 (Cal.App. Dist.6 08/26/2013) the California Court of Appeal explained the purpose of independent counsel as first stated in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 as modified by California statutes.

FACTUAL BACKGROUND

After soil and groundwater contamination in the City of Modesto was traced back to a dry cleaning facility known as Halford’s Cleaner’s (Halford’s), the federal government brought a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action against the owners of the property on which Halford’s was located, as well as the lessees who owned and/or operated the facility, to recover the costs of monitoring and remediating the contamination. The defendants in the Lyon action subsequently filed third-party actions against, among others, appellant MBL, Inc. (MBL), a supplier of dry cleaning products including perchloroethylene (PCE), seeking indemnity, contribution and declaratory relief.

MBL tendered the defense of these third-party actions to its insurers, Federal Insurance Company (Federal), Centennial Insurance Company (Centennial), Atlantic Mutual Insurance Company (Atlantic), Nationwide Indemnity Company (Nationwide), Utica Mutual Insurance Company (Utica) and Great American Insurance Company (Great American) (hereafter collectively referred to as Insurers). The Insurers accepted the tender of defense, subject to reservations of various rights, and retained counsel to provide MBL with a defense. MBL refused to accept retained counsel, arguing the Insurers’ reservations of rights created a conflict of interest and demanding the Insurers instead pay for counsel of MBL’s choosing. The Insurers denied there was any such conflict of interest and filed declaratory relief actions. The trial court granted summary judgment in favor of the Insurers, finding there was no actual conflict of interest.

In a related appeal, Great American sought to preserve its right to equitable contribution from the other Insurers in the event MBL’s appeal is successful. Alone among the Insurers, Great American paid MBL’s independent counsel for the costs of defending the third-party actions, subject to a reservation of the right to reimbursement from MBL if it succeeded in its declaratory relief action.

MBL supplies PCE, and other dry cleaning products, to dry cleaning facilities, and has done so for a number of years. In 2007, MBL was named as a defendant in a number of third-party complaints and cross-complaints filed in the Lyon action. According to the allegations of the Lyon action, wastewater containing PCE was discharged into the sewer system as part of Halford’s dry cleaning operations until the mid-1980s. PCE was also leaking from an old dry cleaning machine through the floor of the facility into the soil and groundwater. In 1989, the site was placed on the National Priorities List of hazardous waste sites.

MBL retained defense counsel, who tendered the defense of the Lyon action to the Insurers, requesting they appoint Cumis counsel. The Insurers accepted the tender of defense subject to various reservations of rights, detailed below, and appointed counsel to defend MBL. MBL refused to allow the Insurers’ appointed counsel to associate as defense counsel, asserting it was entitled to independent counsel of its own choosing pursuant to Civil Code section 2860. The Insurers advised MBL it was only entitled to Cumis counsel if their reservations of rights created a conflict of interest and, with the exception of Great American, refused to pay the defense costs incurred by MBL’s counsel.

INSURERS’ COMPLAINTS FOR DECLARATORY RELIEF

The Insurers moved for summary adjudication of the causes of action for declaratory relief regarding their duty to provide independent counsel to represent MBL. The Insurers argued that the limited reservations of rights asserted by these insurers did not create a conflict of interest under California Civil Code section 2860 which modified the Cumis decision.

In June 2009, after the matter was briefed and argued, the trial court granted the Insurers’ motions. In its order, the court noted that the specific reservations of rights by [the] insurers did not present a conflict which would require the appointment of independent counsel. The court further found the general reservation of rights to deny coverage does not present a conflict which would require the appointment of independent counsel.

After amending its complaint to add a cause of action for reimbursement against MBL, Great American filed a motion for summary adjudication and summary judgment against MBL. The motion further sought summary judgment on MBL’s cross-complaint against Great American. The trial court granted Great American’s motion in its entirety and entered a declaratory and money judgment on October 27, 2010, in favor of Great American and against MBL.

DISCUSSION

Entitlement to Independent Counsel – Statutory and Case Law

In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d 358, the court held that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer’s expense.

The Cumis opinion was codified in 1987 by the enactment of section 2860, which clarifies and limits the rights and responsibilities of insurer and insured as set forth in Cumis.

As statutory and case laws make clear, not every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer’s expense. For example, the mere fact the insurer disputes coverage does not entitle the insured to Cumis counsel; nor does the fact the complaint seeks punitive damages or damages in excess of policy limits. The insurer owes no duty to provide independent counsel in these situations because the Cumis rule is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests. For independent counsel to be required, the conflict of interest must be significant, not merely theoretical, actual, and not merely potential. The insured’s right to independent counsel depends upon the nature of the coverage issue, as it relates to the issues in the underlying case.

An insurer that reserves its rights under a policy of insurance will usually raise a request by the insured for independent counsel. However, unless the reservation actually raises the need for the application of the ethical duty of an attorney to avoid representing conflicting interests. If that duty exists independent counsel is required. If not, the insurer may assert its right to control the defense of the insured with counsel of its choice.

In Federal Insurance Company v. MBL, Inc., H036296, H036578 (Cal.App. Dist.6 08/26/2013) the California Court of Appeal explained the purpose of independent counsel as first stated in San Diego Federal Credit Union v. Cumis Ins. Society, Inc. (1984) 162 Cal.App.3d 358 as modified by California statutes.

FACTUAL BACKGROUND

After soil and groundwater contamination in the City of Modesto was traced back to a dry cleaning facility known as Halford’s Cleaner’s (Halford’s), the federal government brought a Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) action against the owners of the property on which Halford’s was located, as well as the lessees who owned and/or operated the facility, to recover the costs of monitoring and remediating the contamination. The defendants in the Lyon action subsequently filed third-party actions against, among others, appellant MBL, Inc. (MBL), a supplier of dry cleaning products including perchloroethylene (PCE), seeking indemnity, contribution and declaratory relief.

MBL tendered the defense of these third-party actions to its insurers, Federal Insurance Company (Federal), Centennial Insurance Company (Centennial), Atlantic Mutual Insurance Company (Atlantic), Nationwide Indemnity Company (Nationwide), Utica Mutual Insurance Company (Utica) and Great American Insurance Company (Great American) (hereafter collectively referred to as Insurers). The Insurers accepted the tender of defense, subject to reservations of various rights, and retained counsel to provide MBL with a defense. MBL refused to accept retained counsel, arguing the Insurers’ reservations of rights created a conflict of interest and demanding the Insurers instead pay for counsel of MBL’s choosing. The Insurers denied there was any such conflict of interest and filed declaratory relief actions. The trial court granted summary judgment in favor of the Insurers, finding there was no actual conflict of interest.

In a related appeal, Great American sought to preserve its right to equitable contribution from the other Insurers in the event MBL’s appeal is successful. Alone among the Insurers, Great American paid MBL’s independent counsel for the costs of defending the third-party actions, subject to a reservation of the right to reimbursement from MBL if it succeeded in its declaratory relief action.

MBL supplies PCE, and other dry cleaning products, to dry cleaning facilities, and has done so for a number of years. In 2007, MBL was named as a defendant in a number of third-party complaints and cross-complaints filed in the Lyon action. According to the allegations of the Lyon action, wastewater containing PCE was discharged into the sewer system as part of Halford’s dry cleaning operations until the mid-1980s. PCE was also leaking from an old dry cleaning machine through the floor of the facility into the soil and groundwater. In 1989, the site was placed on the National Priorities List of hazardous waste sites.

MBL retained defense counsel, who tendered the defense of the Lyon action to the Insurers, requesting they appoint Cumis counsel. The Insurers accepted the tender of defense subject to various reservations of rights, detailed below, and appointed counsel to defend MBL. MBL refused to allow the Insurers’ appointed counsel to associate as defense counsel, asserting it was entitled to independent counsel of its own choosing pursuant to Civil Code section 2860. The Insurers advised MBL it was only entitled to Cumis counsel if their reservations of rights created a conflict of interest and, with the exception of Great American, refused to pay the defense costs incurred by MBL’s counsel.

INSURERS’ COMPLAINTS FOR DECLARATORY RELIEF
The Insurers moved for summary adjudication of the causes of action for declaratory relief regarding their duty to provide independent counsel to represent MBL. The Insurers argued that the limited reservations of rights asserted by these insurers did not create a conflict of interest under California Civil Code section 2860 which modified the Cumis decision.
In June 2009, after the matter was briefed and argued, the trial court granted the Insurers’ motions. In its order, the court noted that the specific reservations of rights by [the] insurers did not present a conflict which would require the appointment of independent counsel. The court further found the general reservation of rights to deny coverage does not present a conflict which would require the appointment of independent counsel.

After amending its complaint to add a cause of action for reimbursement against MBL, Great American filed a motion for summary adjudication and summary judgment against MBL. The motion further sought summary judgment on MBL’s cross-complaint against Great American. The trial court granted Great American’s motion in its entirety and entered a declaratory and money judgment on October 27, 2010, in favor of Great American and against MBL.

DISCUSSION

Entitlement to Independent Counsel – Statutory and Case Law

In San Diego Federal Credit Union v. Cumis Ins. Society, Inc., supra, 162 Cal.App.3d 358, the court held that if a conflict of interest exists between an insurer and its insured, based on possible noncoverage under the insurance policy, the insured is entitled to retain its own independent counsel at the insurer’s expense.

The Cumis opinion was codified in 1987 by the enactment of section 2860, which clarifies and limits the rights and responsibilities of insurer and insured as set forth in Cumis.

As statutory and case laws make clear, not every conflict of interest triggers an obligation on the part of the insurer to provide the insured with independent counsel at the insurer’s expense. For example, the mere fact the insurer disputes coverage does not entitle the insured to Cumis counsel; nor does the fact the complaint seeks punitive damages or damages in excess of policy limits. The insurer owes no duty to provide independent counsel in these situations because the Cumis rule is not based on insurance law but on the ethical duty of an attorney to avoid representing conflicting interests. For independent counsel to be required, the conflict of interest must be significant, not merely theoretical, actual, and not merely potential. The insured’s right to independent counsel depends upon the nature of the coverage issue, as it relates to the issues in the underlying case.

Not every reservation of rights entitles an insured to select Cumis counsel. There is no such entitlement, for example, where the coverage issue is independent of, or extrinsic to, the issues in the underlying action or where the damages are only partially covered by the policy. Independent counsel is required where there is a reservation of rights and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim.

The court of appeal agreed with the Insurers. There was no evidence to show that the Insurers’ representation of other parties in the Lyon action gave rise to a “significant, not merely theoretical, actual, not merely potential” conflict of interest. General reservations of rights do not raise a conflict because they are just that: general reservations. At most, they create a theoretical, potential conflict of interest – nothing more.

Because it decided that judgment was properly entered in favor of the other Insurers, the trial court also properly entered judgment in favor of the other Insurers on Great American’s declaratory relief action.  At the heart of this dispute is the question whether MBL was entitled to independent counsel; since it was not, the other Insurers were not obligated to contribute to payment of MBL’s counsel and Great American is not entitled to equitable contribution from the other Insurers.

Equitable contribution is a loss-sharing mechanism intended to accomplish ultimate justice among coinsurers of the same insured.  The fundamental prerequisite to equitable contribution is shared responsibility for the loss.

None of the Insurers disputed their duty to defend MBL. They all acknowledged that duty and agreed to defend MBL, subject to their reservations of various rights. MBL, however, insisted on retaining independent counsel, rather than allowing counsel appointed by the Insurers to conduct its defense. As discussed above, MBL was not entitled to independent counsel, thus none of the Insurers (including Great American) were ever obligated to reimburse MBL for the fees generated by that counsel. Great American, as it happens, did reimburse MBL for those fees, but because there was no obligation to pay, Great American can only seek reimbursement for those fees from MBL, not the other Insurers.

ZALMA OPINION

The Cumis decision – regardless of the opinion of counsel and the public – is not an insurance decision. It is, rather, a decision regarding the ethical duty of an attorney to avoid representing conflicting interests. If there is a real conflict of interest between the lawyer retained by the insurer and the insured the lawyer was retained to defend the insured has the right to seek independent counsel. If, however, in a case like this one, the reservation of rights do not raise an inference that counsel is representing conflicting interests there is no obligation to provide the insured with independent counsel.

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Courts across the nation give lip-service to the fact that insurance contracts are contracts that must be interpreted like every other contract. However, like the creatures in George Orwell’s Animal Farm some litigants are more equal than others and some contracts are read as written while insurance contracts are modified by court opinion to change the wording of the policy. Reference to precedent and public policy make agreed to language in a contract of insurance contain words neither party agreed to when the contract was purchased.

The Supreme Court of Texas was asked to resolve an insurance coverage dispute arising from the fact that homes built with an exterior insulation and finish system (“EIFS”) suffer serious water damage that worsens over time in Lennar Corp. v. Markel American Insurance Co., 11-0394 (Tex. 08/23/2013). Lennar Corp., a homebuilder, facing potentially hundreds of expensive suits, undertook to remove the product from all the homes it had built and replace it with conventional stucco. The homebuilder’s insurers refused to pay for the remediation program, because there was no claim and no evidence of actual property damage. The insurers preferred to rely on the policy language and do nothing until homeowners claimed damages or sued which is what it agreed to do by the wording of the policy. As a result the insurers denied coverage of the costs.

The Issues

The litigation lasted more than twelve years between the builder and its insurers. The case before the Supreme Court of Texas, after twelve years, left only one insurer and the issues were winnowed to two:
Not having consented to the homebuilder’s remediation program, is the insurer nevertheless responsible for the costs if it suffered no prejudice as a result?
Is the insurer responsible for (i) costs incurred to determine property damage as well as to repair it, and (ii) costs to remediate damage that began before and continued after the policy period?

EIFS 
Long used in commercial construction, EIFS was marketed in the early 1990s as an attractive alternative to conventional stucco in home construction. But installed on wood-frame walls typical of single-family homes, EIFS traps water inside, causing rot and structural damage, mildew and mold, and termite infestations. After the problems with EIFS were exposed on the NBC television show Dateline in 1999, homeowner complaints poured in.

Self Help
Lennar decided not merely to address complaints as it received them but to contact all its homeowners and offer to remove the EIFS and replace it with conventional stucco. Lennar began its remediation program in 1999 and finished in 2003. Almost all the homeowners accepted Lennar’s offer of remediation. A few were paid cash. Only three ever sued. All settled.

Early in the process, Lennar notified its insurers that it would seek indemnification for the costs. The insurers refused to participate in Lennar’s proactive, comprehensive efforts, preferring instead to wait and respond to homeowners’ claims one by one.

Lennar arguably made a good business decision to remove and replace all the EIFS to prevent further damage. Lennar and Markel also disputed whether coverage was precluded by Lennar’s failure to comply with Condition E of the policy, which states in part: “it is a requirement of this policy that . . . no insured, except at their own cost, voluntarily make any payment, assume any obligation, or incur any expense . . . without [Markel's] consent.” Markel had not consented to Lennar’s remediation settlements.
After hearing evidence for eight days, the jury found that Lennar’s defective use of EIFS in home construction “create[d] an imminent threat to the health or safety of the inhabitants of the homes”, and that Lennar took “reasonable steps to cure the construction defect as soon as practicable and within a reasonable time.” The jury failed to find that Markel was prejudiced by Lennar’s “failure to obtain Markel’s consent (a) to enter into any compromise settlement agreement, or (b) to voluntarily make any payment, assume any obligation, or incur any expense.” The trial court rendered judgment awarding Lennar $2,965,114.16, the damages found by the jury less a $425,000 credit for settlements with other insurers, $2,421,825.89, the attorney fees found by the jury, and $1,227,476.03 in prejudgment interest.

The court of appeals reversed and rendered judgment for Markel on two grounds.

Analysis

Condition E of Markel’s policy forbade Lennar, “except at [its] own cost, [from] voluntarily mak[ing] any payment, assum[ing] any obligation, or incur[ring] any expense . . . without [Markel's] consent.” Though Markel did not consent to Lennar’s settlements with homeowners, it conceded, as Lennar I held, that Texas precedent required that the provision does not excuse its liability under the policy unless it was prejudiced by the settlements, words that do not exist in the policy.

At trial, Markel vigorously contended that Lennar’s settlements were prejudicial, largely because Lennar offered remediation to homeowners with damaged houses who would never have sought redress had Lennar left them alone.  Markel argued: “When an insurer is not asked to adjust a claim, provide a defense, or be involved in negotiating a settlement, but is simply told it has to pay for a voluntary payment, the insurer has suffered prejudice as a matter of law. That prejudice is even starker in this case, in which the insured actively solicited claims which might otherwise never have been brought and made payments which were not covered under the Policy.”

Assuming Markel is right, that an insurer need not show prejudice from an insured’s failure to comply with a policy requirement that is “considered essential to coverage,” the Supreme Court found that the Loss Establishment Provision does not qualify, certainly not for the reasons Markel argues. The Loss Establishment Provision is no more central to the policy than Condition E, and the requirement that Markel show prejudice from Lennar’s non-compliance with either operates identically. Markel failed to prove that it was prejudiced in any way by Lennar’s settlements.
The jury’s failure to find prejudice leaves but one conclusion: that Lennar’s loss as shown by the settlements is the amount Markel is obligated to pay under the policy. Absent prejudice to Markel, Lennar’s settlements with homeowners establish both its legal liability for the property damages and the basis for determining the amount of loss.

The policy obligated Markel to pay “the total amount” of Lennar’s loss “because of” property damage that “occurred during the policy period,” including “continuous or repeated exposure to the same general harmful condition.” Focusing on “because of,” the court of appeals held that the policy covers only the cost of repairing home damage, not the cost of locating it, and because Lennar’s evidence did not segregate the two, it was entitled to recover nothing. Additionally, Markel argued that Lennar’s evidence improperly included the cost of repairing home damage that occurred outside the policy period. The court of appeals did not reach this argument.

For damage that occurs during the policy period, coverage extends to the “total amount” of loss suffered as a result, not just the loss incurred during the policy period. No question remains that all 465 houses at issue suffered property damage during the policy period, which began before or during the policy period and continued until it was repaired, all because of water trapped in home walls by EIFS applied to wood-frame construction. Thus, the policy covered Lennar’s total remediation costs.

The Supreme Court concluded that Markel’s policy covered Lennar’s entire remediation costs for damaged homes. Lennar’s responsible efforts to correct defects in its home construction did not absolve Markel of responsibility for the costs under its liability policy.

Justice Boyd wrote separately and explained that the policy does not cover Lennar’s liabilities because Lennar incurred those liabilities through settlements to which Markel had not “previously agreed in writing.” However, because Texas precedent compels the court to disregard the policy’s consent requirement and impose a prejudice requirement into the policy’s wording, the jury’s finding that Lennar’s failure to obtain Markel’s prior agreement to the settlements did not harm or prejudice Markel, he concurred in the Court’s judgment.

ZALMA OPINION
Markel was the victim of the public policy of the state of Texas that rewrote the policy wording requiring prejudice to the insurer before the consent to settlement provision could be enforced. The insured, Lennar, and Markel, entered into a written contract that clearly and unambiguously stated that Markel would owe nothing if the insured entered into a settlement without the consent of Markel. There is no question that Markel did not agree to the various settlements reached by Lennar. Regardless of the clear and unambiguous language of the policy the Texas Supreme Court required Markel to pay multi-millions of dollars it did not agree to pay.

Insurance is a contract that should be given meaning. If the parties wanted a prejudice requirement in the policy they could have negotiated such a requirement. They did not and the Supreme Court put it in and changed the agreed to wording of the contract.

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It should be axiomatic that an insurance company is entitled to determine for itself what risks it will accept, and therefore to know all the facts relative to the applicant’s physical condition. “It has the unquestioned right to select those whom it will insure and to rely upon him who would be insured for such information as it desires as a basis for its determination to the end that a wise discrimination may be exercised in selecting its risks.” (Robinson v. Occidental Life Ins. Co.  (1955) 131 Cal. App. 2d 581, 586 [281 P.2d 39].

When an insurer rescinds a policy of insurance because it was deceived by the insured the beneficiary of the policy will do almost anything to obtain the benefits of the policy. In Ronald Smith, Successor Trustee Under the James W. Coops Trust v. Pruco Life Insurance Company of New Jersey, No. 12-3071-cv (2d Cir. 03/19/2013) the Second Circuit Court of Appeal was asked to overturn the rescission of a life insurance policy.

FACTS
Ronald Smith appealed the district court’s entry of judgment, following a bench trial, in favor of defendant-appellant Pruco Life Insurance Company of New Jersey (“Pruco”). Smith sought to recover benefits as the beneficiary of a term life insurance policy upon the death of the insured, Michael Coops. Relying on an application for benefits attached to Coops’s policy at the time of delivery, the district court concluded that the policy never became effective because of Coops’s failure to disclose a cancer diagnosis, and that Smith was therefore not entitled to a benefit.  Smith conceded that the application contained information Coops knew to be untrue when the policy was delivered, and that Pruco would not have issued the policy had the information been correct.

Smith alleged that he was the beneficiary of a $1 million insurance policy issued by Pruco on the life of Michael Coops; that Michael Coops had died; and that Smith was therefore entitled to a payment from Pruco of $1 million plus interest from the date of Coops’s death. Following a bench trial the district court entered judgment in favor of Pruco holding it was entitled to rescind the policy because of a material misrepresentation made by Coops in securing the policy and Smith was therefore not entitled to a benefit. Smith now appeals the district court judgment.

The material facts were not disputed. Coops applied by telephone for a term life insurance policy from Pruco in July of 2007; a Pruco employee recorded the information Coops provided. On or before September 7, 2007, Coops was diagnosed with Stage IV colon cancer. Subsequently, on September 29, 2007, Pruco delivered the life insurance policy to him. The policy contained the following statement: “This policy and any attached copy of an application, including an application requesting a change, form the entire contract.”

Coops was presented with two copies of the application when the policy was delivered to him on September 29, 2007. The first was physically attached to the policy; the second was not. Coops made two changes to the latter copy, first correcting an error in his billing address, and second, signing and dating the application, thereby attesting that: (1) “[t]o the best of [his] knowledge and belief, the statements in [the] application [were] complete, true and correctly recorded,” and (2) he would “inform the Company of any changes in [his] health, mental or physical condition, or of any changes to any answers on [the] application, prior to or upon delivery of [the] policy. A representative of Pruco also signed that copy of the application. Pruco retained the signed and amended version of the application, while Coops retained the version that was attached to his policy.

Coops never informed Pruco of his cancer diagnosis or treatment or attempted to amend or supplement the information in the application, which indicated that he had not been diagnosed with cancer. The parties agreed that Pruco issued the policy only because it did not know of the diagnosis prior to, or at the time of, delivery on September 29, 2007. Coops paid premiums until he died on April 28, 2009. Following his death, Pruco learned for the first time that Coops had been diagnosed with colon cancer before the policy was delivered. Pruco rescinded the policy, relying on New York law that permits an insurer to rescind an insurance policy ab initio (from its inception) if the insured made a material misrepresentation when he or she secured the policy. It denied Smith’s claim for a death benefit and returned Coops’s premium payments.

The district court held a bench trial at which the primary disputed issue was whether the court could consider the application attached to the policy in determining whether Coops had made a misrepresentation to Pruco.

ANALYSIS
Smith focuses on the term “true copy” of the application used in the New York statute. He presumes the application for insurance sought to be introduced in evidence is the one that bears Coops’s signature, and argues that a “true copy” of that application was not attached to the policy, as the version that was attached was unsigned and did not reflect Coops’s correction of his billing address.

Under the statute insurance companies are obligated to set forth in each policy issued the entire agreement, as well as every statement or representation which induced its making, and upon which the company relied, if it is to be available as a defense. The statute was created to protect the insured or his or her beneficiary by providing the insured with the opportunity to examine those writings, including applications that may be relevant to the policy and, particularly in the case of applications, affording an opportunity to correct any incorrect statements. By allowing the insured to review, understand and correct at the time of delivery any information that the insurance company might raise as a defense to coverage is to ensure that interested persons may avoid either being misled as to the insurance protection obtained or paying premiums for years in ignorance of facts nullifying the supposed protection.

In this case, it is undisputed the unsigned copy of the application was attached to the policy at the time of delivery. Coops had an opportunity to review and correct the terms, conditions and other information contained therein, and that information therefore could be, and indeed was, incorporated into the contract between Pruco and Coops. The precise document that was attached to the policy makes clear that the policy would not become effective unless and until it was delivered and accepted, Coops’s health remained as stated in the application, and the first premium was paid.

Because the representations, terms and conditions on which Pruco seeks to rely were expressly incorporated into the policy and were attached to that policy at the time of delivery, they may be considered in evidence.

Because the Second Circuit concluded that the application was properly admitted as evidence at the bench trial, Pruco could rely on it to establish that the contract could not come into effect unless and until those conditions were satisfied. [Stipcich v. Metro. Life Ins. Co., 277 U.S. 311, 316 (1928)] where the U.S. Supreme Court held that both by the terms of the application and familiar rules governing the formation of contracts no contract came into existence until the delivery of the policy, and at that time the insured had learned of conditions gravely affecting his health, unknown at the time of making his application. In Stipcich the Supreme Court observed that “[i]nsurance policies are traditionally contracts uberrimae fidei and a failure by the insured to disclose conditions affecting the risk, of which he is aware, makes the contract voidable at the insurer’s option.” Insurance companies seek a wealth of health history information from applicants because that information is extremely important to the underwriting decision.

I agree, also, with the Third Circuit’s decision in New York Life Ins. Co. v. Johnson, 923 F.2d 279 (3d Cir. 01/15/1991), where it explained why an innocent beneficiary could receive no benefits if grounds for rescission exist that may have affected the Second Circuit’s decision in this case. It said:

While a court might sympathize with a beneficiary who does not receive the proceeds of a policy obtained by the insured’s fraud, there are strong reasons of public policy supporting the rule … If the lie is undetected during the two year contestability period, the insured will have obtained excessive coverage for which he has not paid. If the lie is detected during the two year period, the insured will still obtain what he could have had if he had told the truth. In essence, the applicant has everything to gain and nothing to lose by lying. The victims will be the honest applicants who tell the truth and whose premiums will rise over the long run to pay for the excessive insurance proceeds paid out as a result of undetected misrepresentations in fraudulent applications (Emphasis added.)

Misrepresentation of material facts in an application for insurance known to the insured before the policy’s inception is fraud and since the insurer was deceived in the inception the policy must be voided.

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Coverage Cannot Be Created by Estoppel

Posted on June 13, 2012 03:32 by Barry Zalma

When Providing a Defense to Questionable Coverage Always Reserve Rights


The Wisconsin Supreme Court reviewed a published decision of the court of appeals, Maxwell v. Hartford Union High School District, 2010 WI App 128, 329 Wis. 2d 654, 791 N.W.2d 195, that insurance coverage had been created by virtue of the insurer’s failure to issue a reservation of rights letter during its unsuccessful defense of the District in a contract lawsuit. The Supreme Court was called upon to decide whether an insurer’s failure to issue a reservation of rights letter is sufficient to defeat, by waiver or estoppel, a coverage clause in an insurance contract that would otherwise justify the insurer’s denial of coverage in Dawn L. Maxwell v. Hartford Union High School District and Hartford Union High School, 2012 WI 58 (Wis. 05/30/2012).

FACTUAL BACKGROUND

Dawn Maxwell (Maxwell) began her employment with the District in 2000, always serving in administrative capacities. She entered into a new employment contract with the District in 2006. It covered the time period from July 1, 2006, to June 30, 2008. In January 2007, however, Maxwell was informed that her position would be eliminated at the end of the 2006-2007 school year. After a series of back and forth negotiations and events, including an interim settlement agreement, Maxwell was told that her employment would end on August 31, 2007.

 On August 30, 2007, Maxwell filed a complaint against the District. Hartford Union High School had a $10,000,000 Public Entity Liability Insurance Policy from Community Insurance Corporation that was in effect from October 1, 2006 to October 1, 2007.

In early September, CIC assigned Attorney Levy to represent the District in the Maxwell case. Attorney Levy entered a formal appearance on September 21, but had been present in an unofficial capacity at the TRO hearing on September 5. Attorney Levy remained an attorney of record for the District until August 2009. During this time, Attorney Levy did not represent CIC; and neither CIC nor Aegis (on CIC’s behalf) sent a reservation of rights letter to the District or Attorney Mohr.

On June 11, 2008, after receiving numerous filings, the circuit court granted partial summary judgment to Maxwell on her claim for breach of contract. It awarded compensatory damages of $103,824.22 at a hearing September 8.

On August 18, 2008, Knee, litigation manager for CIC via Aegis, sent a response by email–informing Mohr that CIC was not liable for any judgment for damages due under Maxwell’s performance contract or any settlement for lost wages or lost benefits. Knee notified Mohr that CIC would continue to defend the District, through appeal, but it was not liable for damages excluded from coverage in the policy.

Analysis

The CIC policy, clearly and unambiguously, excluded coverage “for that part of any award or settlement which is, or reasonably could be deemed to be, compensation for loss of salary or fringe benefits of your employee(s).” The trial court had no difficulty determining that the exclusion applied to the monetary damages claimed by Maxwell. That the CIC policy excludes coverage was never in dispute.

The general rule is well established that the doctrine of waiver or estoppel based upon the conduct or action of the insurer or its agent is not applicable to matters of coverage as distinguished from grounds for forfeiture.  While estoppel may be used to prevent an insurer from insisting upon conditions which result in forfeiture, estoppel has not been used in Wisconsin or in the majority of states as a means where the scope of coverage of an insurance policy can be expanded to include coverage which was not provided for or was excluded in the contract.

As a general rule, conditions and terms, either of an inclusionary or exclusionary nature in the policy, go to the scope of the coverage or delineate the risks assumed, as distinguished from conditions and terms which furnish a ground for the forfeiture of coverage or defeasance of liability.

An insurer is liable for all risks it agrees to assume in the insurance contract. Exclusions in the contract are written to limit coverage. The insurer bases premiums on anticipated risks and the realization that ambiguities in the policy are likely to be construed against the insurer. An insured is entitled to the coverage it has paid for, provided that it does not forfeit that coverage by violating some provision of the contract. The Wisconsin Supreme Court noted that a contract of insurance should not be rewritten to bind the insurer to a risk it did not contemplate and for which it has not been paid. In addition the Supreme Court concluded that waiver and estoppel cannot be used to supply coverage from the insurer to protect the insured against risks not included in the policy or expressly excluded therefrom, for that would force the insurer to pay a loss for which it has not charged a premium.

Estoppel may prevent an insurer from enforcing certain policy provisions against its insured. However, even where the relationship of insurer and insured exists, estoppel cannot be used to enlarge the coverage of an insurance policy, for then the effect would be to create a new contract providing coverage for which no premium has been paid.

Insurers have multiple duties to their insureds. These duties include a duty to defend their insureds and a duty to act in good faith toward their insureds. When insurers breach these duties that arise out of the insurance contract, they may be subject to a measure of damages not limited by the contract. Liability insurance coverage usually includes a duty to defend and a duty to indemnify. The duty to indemnify and the duty to defend are separate contractual obligations. A policy may provide one without providing the other. When a contract imposes a duty to defend, however, that duty is broader than the duty to indemnify.

In this case, CIC provided a defense – fulfilling its duty to defend the District. While the District raised several claims in its third-party complaint against CIC, the issue before this court is whether CIC’s failure to send a reservation of rights letter while defending the District is enough, under waiver or estoppel, to prevent CIC from invoking its defense of noncoverage. CIC’s failure to issue a reservation of rights letter in this case did not constitute a breach of the duty to defend or bad faith.

Regardless of its conclusion the Supreme Court emphasized the importance of insurers communicating with their insureds. An insurer is in a superior position to the insured in relation to the formation and interpretation of the insurance contract.  It warned that its opinion must not be interpreted as a license for insurers not to communicate forthrightly with their insureds –especially when insurers dispute coverage. It certainly would have been better practice for CIC to send a reservation of rights letter in this case. Its failure to do so has created ill will and completely overshadowed CIC’s extensive costs in providing a defense. As CIC conceded in oral argument, this case would not be here if CIC had sent a reservation of rights letter. The lesson here is that CIC could have avoided the costs of this appeal by issuing a reservation of rights letter. A reservation of rights letter can not only head off litigation but also preserve forfeiture defenses at a time when an insurer may not know whether such a defense exists. As we have clearly stated, forfeiture defenses can be waived, because the insured has purchased the coverage the insurer seeks to deny.

The Supreme Court concluded that the failure to issue a reservation of rights letter cannot be used to defeat, by waiver or estoppel, a coverage clause – as distinguished from grounds for forfeiture – in an insurance contract.

ZALMA OPINION

This is a lawsuit and appeal all the way to the Supreme Court of Wisconsin that could have been avoided by following good claims handling procedures and providing a reservation of rights letter to the plaintiff advising that although defense would be provided if the damages claimed were proved then the insurer would refuse to pay indemnity. The claims people failed to do so, provided the defense without reservation, and when the verdict came in they refused to indemnify since the policy provided no coverage for the judgment entered against the insured.

Insurers who think they save money by laying off competent and experienced adjusters and replace them with young, inexperienced, untrained and inexpensive adjusters will learn — as more of these cases work their way through the courts — that the inexpensive adjusters are more expensive, to a factor of twenty, than the old prows they let go. The insurer needed to go to the Supreme Court to avoid paying damages for which it collected no premium and possible bad faith damages when the majority refused to make coverage by claimed estoppel although the insurer did not convince all of the justices.

The lesson is clear: Only use experienced, well-trained, knowledgeable and professional claims personnel. 

Barry Zalma, Esq., CFE, has practiced law in California for more than 40 years as an insurance coverage and claims handling lawyer. He also serves as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

 Mr. Zalma recently published the e-books, “Zalma on Insurance Fraud – 2012?; “Zalma on Diminution in Value Damages – 2012,”“Zalma on Insurance,” “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Arson for Profit”  and others that are available at www.zalma.com/zalmabooks.htm.

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

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Holy Bat Trap, Batman! – Guano & Insurance

Posted on March 16, 2012 02:03 by Barry Zalma

The plaintiffs filed suit against their insurer, Auto-Owners, for breach of contract and bad faith, claiming that Auto-Owners was liable for the total loss of their vacation home that was uninhabitable and unsaleable as a result of the accumulation of bat guano between the home’s siding and walls.  The Supreme Court of Wisconsin was asked to resolve the question whether the pollution exclusion in the Auto Owners policy defeated the claim in Joel Hirschhorn and Evelyn F. Hirschhorn v. Auto-Owners Insurance Company, 2012 WI 20 (Wis. 03/06/2012).

Auto-Owners moved for summary judgment, which the circuit court initially denied. Upon reconsideration, however, the circuit court agreed with Auto-Owners that its insurance policy’s pollution exclusion clause excluded coverage for the Hirschhorns’ loss. The court of appeals reversed, concluding that the pollution exclusion clause is ambiguous and therefore must be construed in favor of coverage.

FACTUAL BACKGROUND
Beginning in 1981, the Hirschhorns owned a vacation home in the town of Lake Tomahawk, Wisconsin. At all relevant times, the home was covered by a homeowners insurance policy issued by Auto-Owners. The policy insured the Hirschhorns against the risk of loss of the home, along with structures and personal property located at the insured premises, against “accidental direct physical loss.” However, the policy contained a pollution exclusion clause that excluded from coverage any “loss resulting directly or indirectly from the “[d]ischarge, release, escape, seepage, migration or dispersal of pollutants . . . .” The policy, also defined “pollutants” as any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, liquids, gases and waste and described waste as including materials to be recycled, reconditioned or reclaimed.

In May 2007, Joel Hirschhorn met with a real estate broker to list the home for sale. At that time, the broker inspected the home and saw no signs of bats. However, in July 2007, upon inspecting the home again, the broker discovered the presence of bats and bat guano. The broker attempted to remove the bats and clean the home. The broker’s efforts failed.

The Hirschhorns and their family stayed at their vacation home between August 9 and 14, 2007. During their stay, they noticed a “penetrating and offensive odor emanating from the home.” Upon leaving on August 14, 2007, they arranged for a contractor to conduct a more thorough inspection of the home. The contractor determined that the cause of the odor was the accumulation of bat guano between the home’s siding and walls. The contractor provided the Hirschhorns a remediation estimate but could not guarantee that cleaning up the bat guano would rid the home of its odor.

Subsequently, on October 23, 2007, the Hirschhorns filed with Auto-Owners a notice of property loss. The notice described the loss as resulting from the discovery of bats in the Hirschhorns’ home and specifically stated, “smell awful and [insured] cannot stay in house . . . .” Auto-Owners denied the claim three days later, reasoning that the accumulation of bat guano was “not sudden and accidental” and, in any case, resulted from “faulty, inadequate or defective” maintenance within the terms of the policy’s maintenance exclusion clause.

On November 4, 2007, the Hirschhorns entered into a contract with a builder to demolish their existing vacation home and construct a new one in its place. In his affidavit, Joel Hirschhorn explained that he thought it was more practical financially to demolish the home than to spend the money to make it habitable again.

After the home’s demolition, on February 22, 2008, Auto-Owners sent to the Hirschhorns a revised denial letter. Auto-Owners denied the Hirschhorns’ claim on the additional ground that “[b]at guano is considered a pollutant” within the terms of the policy’s pollution exclusion clause.

The parties did not dispute the material facts giving rise to the Hirschhorns’ loss. Rather, the sole issue presented to the Supreme Court was whether the pollution exclusion clause in Auto-Owners’ insurance policy excluded coverage for the loss of the Hirschhorns’ home that allegedly resulted from the accumulation of bat guano.

ANALYSIS
Since Auto-Owners’ insurance policy defines “pollutants” and lists waste as one such irritant or contaminant in its definition of “pollutant” the Supreme Court analyzed whether bat guano was the type of waste excluded by the policy.

Noting that the reach of the pollution exclusion clause must be limited by reasonableness, or everyday incidents may be characterized as pollution and the contractual promise of coverage reduced to a fantasy. For example, exhaled carbon dioxide, while potentially harmful in a confined and poorly ventilated area, is universally present and generally harmless since every animal, including people, exhale carbon dioxide. .

The ordinary meaning of “irritant” is a condition of inflammation, soreness, or irritability of a bodily organ or part. The Supreme Court concluded that bat guano falls unambiguously within the term “pollutants” as defined by Auto-Owners’ insurance policy. Bat guano is composed of bat feces and urine. Bat guano is or threatens to be a solid, liquid, or gaseous irritant or contaminant. That is, bat guano and its attendant odor make impure or unclean the surrounding ground and air space  and can cause inflammation, soreness, or irritability of a person’s lungs and skin. The Supreme Court noted that the Wisconsin  Department of Health & Family Services in cooperation with the Agency for Toxic Substances & Disease Registry, Indoor Air and Health Issues concluded that people who live around large quantities of bat wastes are more likely to become ill with histoplasmosis; people who contact mites that live in bat wastes may get skin rashes; and molds that grow in moist, warm, highly organic situations may increase asthma attacks in affected people.

The Supreme Court noted that these points cannot be seriously contested by the Hirschhorns because they alleged in their complaint that the odor of bat guano was so penetrating and offensive as to render their vacation home and unfit place to live. As a result the Supreme Court concluded that a reasonable person in the position of the insured would understand bat guano is waste. Since bat guano is composed of bat feces and urine bat guano is commonly understood to be waste.

The Hirschhorns argue, and the court of appeals agreed, that the term “waste” does not necessarily call to mind feces and urine, given the policy’s other examples of irritants and contaminants. The Supreme Court disagreed because, unlike exhaled carbon dioxide, bat guano is not universally present and generally harmless in all but the most unusual instances. To the contrary, bat guano is a unique and largely undesirable substance that is commonly understood to be harmful. A reasonable homeowner should understand bat guano to be a pollutant.

The Supreme Court’s conclusion that bat guano falls unambiguously within the policy’s definition of “pollutants” was not enough to resolve the dispute. The court needed to determine whether the Hirschhorns’ alleged loss resulted from the “discharge, release, escape, seepage, migration or dispersal” of bat guano under the plain terms of the policy’s pollution exclusion clause.

The policy does not define “discharge,” “release,” “escape,” “seepage,” “migration,” or “dispersal.” The Supreme Court was required, therefore, to construe these terms according to their plain and ordinary meanings as understood by a reasonable person in the position of the insured. As their dictionary definitions make clear, the six terms are often synonymous with one another and taken together constitute a comprehensive description of the processes by which pollutants may cause injury to persons or property.

The bat guano, deposited and once contained between the home’s siding and walls, emitted a foul odor that spread throughout the inside of the home, infesting it to the point of destruction. The Hirschhorns acknowledged as much in their complaint. They alleged that “the drapes, carpets, fabrics and fabric furnishings in the home were rendered unusable as a result of the absorption of the bat guano odor.” Accordingly, implicit in their complaint is an allegation that the bat guano somehow separated from its once contained location between the home’s siding and walls and entered the air, only to be absorbed by the furnishings inside the home.

ZALMA OPINION
Interestingly, as noted in a footnote to the opinion the Supreme Court noted that the Hirschhorns helped the court decide against their position by by conceding that a reasonable insured may understand the pollution exclusion to include human excrement. They failed to explain, however, why the policy’s definition of “pollutants” should be interpreted differently for feces and urine from humans is more a pollutant than feces and urine from to bats.

There should be no question that a collection of excrement from any animal, whether human, bird, bat or aardvark, if collected sufficiently in a home to make the dwelling incapable of sustaining life comfortably in the structure is both waste and a pollutant. The Wisconsin court clearly applied the the common meaning of a group of unambiguous terms.

© 2012 – Barry Zalma
Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders.

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

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A Deterrent to Insurance Fraud

Posted on November 1, 2011 05:59 by Barry Zalma

Insurance fraud has been estimated to take between $80 billion and $300 billion a year from the insurance industry in the United States. Every state has a statute making insurance fraud a crime including the federal crimes of mail and wire fraud and the Racketeer Influenced and Corrupt Organization Act (RICO). RICO can also be a civil action which allows for treble damages or punitive damages.

Some insurer victims of insurance fraud have become proactive. In State Farm Mutual Automobile Insurance Company; State Farm Fire and v. Arnold Lincow, D.O.; Richard Mintz, D.O.; Steven Hirsh; 7622 Medical, No. 10-3087 (3d Cir. 09/16/2011) the Third Circuit dealt with an appeal from State Farm’s successful trial against some doctors and clinics who defrauded it and those it insured.

Facts

After a four-week jury trial plaintiff State Farm successfully convinced the jury that defendants, a number of health care providers (“Defendants”), engaged in various schemes to defraud State Farm by billing it for medical services that were either not provided or provided unnecessarily, and were illegal under RICO, fraud statutes, and common law fraud. Following trial, Defendants filed motions for judgment as a matter of law or, in the alternative, for a new trial or, in the alternative, to alter or amend the judgment. The District Court denied Defendants’ motions in their entirety.

Plaintiff alleged that Defendants were members of a conspiracy that sharply inflated the costs of medical care for car accident victims by prescribing tests and treatments, as well as prescriptions and medical equipment – whether medically necessary or not – and then routinely billed State Farm for additional treatments that were never provided. At trial, State Farm’s proof of Defendants’ fraud consisted of State Farm’s claim files and testimony of patients, physicians at Defendants’ medical facilities, Defendant physicians, and experts.
After a four-week trial, the jury awarded Plaintiff over $4 million against all Defendants jointly and severally, and individual Defendants were found liable for punitive damages totaling $11.4 million

Analysis

The Third Circuit’s reviews a district court’s order granting or denying a motion for a new trial for abuse of discretion unless the court’s denial of the motion is based on the application of a legal precept, in which case the review is plenary. A new trial may be granted on the basis that a verdict was against the weight of the evidence only if a miscarriage of justice would occur if the verdict were to stand.

State Farm noted that RICO is distinct because the members of the association-in-fact enterprise include all the defendants, there is a complete identity between the enterprise and the defendants and, therefore, no distinctiveness among the defendants.  As the District Court noted and State Farm urged, the intracorporate conspiracy doctrine is not universally accepted, and it is questionable whether the Defendant’s version is completely accurate.

The defendants argued that State Farm failed to prove: (1) the elements of an association-in-fact enterprise; (2) that defendant Mintz conspired with the other Defendants to defraud, as § 1962(d) requires; (3) that Mintz’s actions proximately caused State Farm’s injuries; (4) that Mintz’s conduct fulfilled the elements of common law fraud; and (5) that Mintz’s conduct fulfilled the elements of statutory fraud under Pennsylvania law. The Third Circuit rejected all of Mintz’s claims to the contrary and held that the weight of the evidence supports the jury’s finding against Mintz and the other defendants. Therefore, the Third Circuit concluded that to let the verdict stand would not result in a miscarriage of justice.

The Third Circuit agreed with State Farm’s assertion that a violation of the Insurance Fraud statute is a civil tort and that, as the jury found and the District Court upheld, the Defendants together contributed to State Farm’s injuries and are thus jointly and severally liable. Moreover, as the District Court correctly noted, there is no requirement for district courts to instruct juries to award damages against each defendant separately and individually. Because State Farm elected to receive treble damages the Third Circuit had no reason to address the contention that the punitive damages award should be reduced.

Lesson

Insurers who are the victims of fraud cannot rely on police agencies to investigate and prosecute perpetrators of insurance fraud. Prosecutions are few and far between. As readers of Zalma’s Insurance Fraud Letter, available FREE at http://www.zalma.com/ZIFL-CURRENT.htm, know prosecutions are increasing but are still anemic and those who are prosecuted and convicted usually receive minor punishments. By being proactive insurers can recover from the fraud perpetrators, like the doctors involved in this case, the insurer can recover what it lost, a bonus of three times the compensatory damages, and actually deter insurance fraud by hitting the perpetrators where it hurts them most, in their wallet.

It is time that insurers emulate the actions of State Farm and the few other insurers who are using civil suits to defeat insurance fraud by taking the profit out of the crime.

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50 Years for $205 Million Health Fraud

Posted on September 21, 2011 08:50 by Barry Zalma

Federal courts in Florida have finally learned what is needed to cut into Medicare Fraud, long prison sentences to those convicted of stealing from Medicare. 

Lawrence Duran, 49, the owner of Miami-based American Therapeutic Corp, a Miami businessman was sentenced to 50 years in prison on September 16, 2011 for masterminding a healthcare fraud scheme that sought to bilk the U.S. government out of more than $200 million. Duran was arrested last October on charges that he executed what prosecutors described in court documents as "one of the largest and most brazen healthcare fraud conspiracies in recent memory." 

His prison sentence was believed to be the harshest ever for defrauding Medicare, the federal insurance plan for the elderly and disabled. He also was ordered to pay $87.5 million in restitution. American Therapeutic was one of the nation's largest chains of community mental health centers licensed by Medicare.

His co-conspirator, Marianella Valera,  will spend the next 35 years in prison for taking part in the $200 million Medicare fraud scam that targeted mental health centers. Marianella Valera manipulated records in order to keep patients at a facility longer than medically required which allowed for higher billings to Medicare bills.

Prosecutors said the company, operating out of the southeastern city widely viewed by law enforcement officials as the healthcare fraud capital of the United States, billed Medicare for more than $205 million in claims over eight years for mental health services that were either unnecessary or never provided to patients.

ZIFL agrees, this has to be the most severe sentence imposed for this type of crime. Judges, like the one in Miami, should understand that Medicare and other insurance fraud will never be deterred unless they impose severe sentences like that imposed on Duran.


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California Insurance Commissioner Dave Jones announced August 19, 2011 that Susana Ragos Chung, 60, a Los Angeles area based attorney has been sentenced in Alameda Superior Court for Insurance Fraud. Chung entered pleas of no contest on two felony counts for violations of Section 549 of the Penal Code, recklessly submitting fraudulent insurance claims. She was sentenced to five years formal probation and to also pay $117,561 in restitution to insurance companies for 15 separate fraudulent claims. In addition, she was ordered to pay $235,123 to the state restitution fund. Chung agreed to place herself on inactive status with the California State Bar pending its mandatory investigation into her criminal conduct, which may result in her disbarment.

In August 2003, the California Department of Insurance (CDI), Benicia Regional Office, Fraud Division, Urban Auto Fraud Task Force initiated an investigation known as "Phantom Menace" into organized automobile insurance fraud in the Bay Area. The Task Force included Investigators from the California Highway Patrol, and Alameda and San Francisco County District Attorney's Offices. As a result of the information and evidence gathered by the Task Force CDI began an undercover investigation in July 2004, which included contacting numerous auto body shops, medical offices and law offices.

Task force members were able to infiltrate a sophisticated auto fraud organized crime ring operating in the Bay Area. This ring was working with law offices in the Los Angeles area. One of these law offices was owned and operated by Chung. In November 2004, task force members acting in undercover capacities were solicited to participate in staged collisions. Numerous collisions were staged and undercover officers were referred to auto body repair shops, medical offices and law offices in an effort to file false automobile insurance claims and secure substantial bodily injury claim settlements.

Between 2003 and 2007, Chung participated in this fraud ring by submitting insurance claims for suspects who staged these collisions for profit. Chung represented the claimants who were allegedly "injured" in these fake collisions. The majority of the people she represented never met her, and many did not even know they had an attorney. Nearly 100 people have been convicted in Alameda County over the last several years as part of this conspiracy, including more than 90 staged collision participants, and three chiropractors. The majority of the participants in these staged collisions readily admitted to law enforcement that no accident had ever occurred.

I understand that California jails are crowded and criminals are being let loose to ease the crowding but running a major fraud ring, in the opinion of ZIFL, requires some real jail time and seizure of the guilty lawyer’s assets. Mr. Jones should not be bragging about this result he should be complaining that the court is being too kind.

 

From Zalma's Insurance Fraud Letter, September 1, 2011 available free at – http://www.zalma.com/ZIFL-CURRENT.htm.

 

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Fraud From Foreign Courts Imported to US

Posted on August 15, 2011 08:41 by Barry Zalma

The United States court system is fair to all who seek redress even if they are not citizens of the United States. People from across the world have been allowed to sue multi-national corporations who do business in the United States to affirm a foreign judgment that could not be collected in the country where the judgment was entered.

Because countries in South America and other areas of the world do not have the same stringent rules of evidence and judicial morality than those in the U.S. courts, suits in the U.S. to enforce foreign judgments and claims of injuries are rife with fraud.

For example, In July 2009, the Second Appellate Division of the Court of Appeal of California remanded the Tellez case to the Superior Court, with an order for the plaintiffs to show cause why that case should not also be dismissed. After several hearings, trial Judge Chaney dismissed the Tellez case in July 2010, noting that the case was rife with blatant fraud, witness tampering, and active manipulation. Judge Chaney also found that the Nicaraguan court system is, at best, fragile in its ability to present consistent rule of law and outcomes and that while many Nicaraguans live in relative poverty and with limited economic opportunity, the lawsuit was not the appropriate vehicle to rectify this situation.

If you are interested in a detailed analysis of the problem read Think Globally, Sue Locally: Trends and Out-of-Court Tactics in Transnational Tort Actions by Jonathan C. Drimmer and Sarah R. Lamoree available at http://www.boalt.org/bjil/documents/Drimmer_Macro2.pdf which covers in at least 72 pages the issues raised in detail.

The report by Mr. Drimmer and Ms. Lamoree is disturbing and makes clear that at least some of these cases are so rife with fraud that some lawyers have been disciplined for misrepresentations made to the court. Evidence of fraud and witness tampering is rampant and the only people who profit from these actions are the lawyers for the plaintiffs and the lawyers for the defendants.

© 2011, Barry Zalma. Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” “Zalma on California Claims Regulations,” “Murder and Insurance Fraud Don’t Mix” and others that are available at on his website.  Mr. Zalma can be contacted via his website http://www.zalma.com,or via email at zalma@zalma.com or you can access his free “Zalma on Insurance Fraud” newsletter. You can also access Mr. Zalma’s Martindale-Hubbell profile on martindale.com.

 

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Property Insurance

Posted on August 2, 2011 05:56 by Barry Zalma

Contrary to the belief of those insured, property insurance does not insure property. As a risk spreading device property insurance only insures people, partnerships or corporations against the risk of loss of property described in the policy.

Insurance against the loss of property is a contract of personal indemnity. It only insures the person(s) named in the policy against certain risks of loss to property in which that person has an interest. A person who has an interest in the property, but is not named as an insured, cannot recover under the policy unless the policy is changed. Similarly, a person named on a policy who has no interest cannot ever recover.

As the California Supreme Court observed in Garvey v. State Farm Fire and Casualty Co., 48 Cal. 3d 395, 770 P.2d 704, 257 Cal. Rptr. 292 (Cal. 03/30/1989), a first party insurance policy provides coverage for loss or damage sustained directly by the insured (e.g., life, disability, health, fire, theft, and casualty insurance). A third party liability policy, on the other hand, provides coverage for liability of the insured to a third party (e.g., a Commercial General Liability (CGL), a directors’ and officers’ (D & O) liability, or an errors and omissions (E & O) policy).

The term “perils” in traditional property insurance language refers to fortuitous, active physical forces such as fire, lightning, wind, and explosion, which bring about or cause the loss.

The cause of loss in the context of a property insurance contract is totally different from that in a liability policy. On the contrary, the right to indemnity in the third party liability insurance context draws on traditional tort concepts of fault, proximate cause, and duty. The liability analysis differs substantially from the coverage analysis in the property insurance context, which draws on the relationship between perils that are either covered or excluded by the contract of insurance. In liability insurance, by insuring for personal liability, and agreeing to cover the insured for his own negligence, the insurer agrees to cover the insured for a broader spectrum of risks than those insured by a property policy.

For example, in Smith v. Jim Dandy Markets, 172 F.2d 616 (1949) the Ninth Circuit found that “regardless of Smith’s interest in the building, he suffered no loss from its destruction. Under California law, which the federal court was required to follow, a fire insurance policy is a personal indemnity contract and a showing of pecuniary damage is prerequisite to recovery. See also Davis v. Phoenix Insurance Co., 111 Cal. 409, 415, 43 P. 1115; and  Alexander v. Security-First Nat’l. Bank, 7 Cal.2d 718, 62 P.2d 735; 14 Cal.Jur. 464, 37.”

For additional commentary in the field see:

1.     Balandran v. Safeco Ins. Co. of Am., 972 S.W. 2d 738, 740–41 (Tex. 1998); National Union Fire Ins. Co. v. CBI Indus., 907 S.W. 2d 517, 520 (Tex. 1995).

2.     Security Mut. Cas. Co. v. Johnson, 584 S.W. 2d 703, 704 (Tex. 1979).

3.     Balandran, 972 S.W. 2d at 741 [quoting State Farm Life Ins. Co. v. Beaston, 907 S.W. 2d 430, 433 (Tex. 1995) and Forbau v. Aetna Life Ins. Co., 876 S.W. 2d 132, 133 (Tex. 1994)].

4.     United States v. Winstar Corporation, 1996.SCT.143 (1996).

 

© 2011, Barry Zalma. Barry Zalma, Esq., CFE, is a California attorney, insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud. Mr. Zalma serves as a consultant and expert, almost equally, for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its senior consultant. He recently published the e-books, “Heads I Win, Tails You Lose — 2011,” “Zalma on Rescission in California,” “Zalma on Diminution in Value Damages,” “Arson for Profit,” “Insurance Fraud,” “Zalma on California Claims Regulations,” “Murder and Insurance Fraud Don’t Mix” and others that are available at on his website.  Mr. Zalma can be contacted via his website http://www.zalma.com,or via email at zalma@zalma.com or you can access his free “Zalma on Insurance Fraud” newsletter. You can also access Mr. Zalma’s Martindale-Hubbell profile on martindale.com.


 

 

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