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Insurance Only Pays for Fortuitous Losses
Misplaced Trust Excluded
Post 4750
W.W. Contracting, Inc. and its owner, Doug Williams (collectively, W.W.), entrusted tools to a W.W. employee but demanded their return at the end of his employment. When the now-former employee allegedly failed to return all the tools, W.W. reported them as stolen and sought insurance coverage for the alleged theft. W.W.'s insurance company denied the claim primarily because W.W.'s insurance policy excluded coverage for property loss "caused by or resulting from dishonest acts by anyone entrusted with the property."
In Doug Williams and W.W. Contracting, Inc. v. Pekin Insurance, Inc., No. 23A-PL-995, Court of Appeals of Indiana (March 4, 2024) the Court of Appeals resolved the dispute.
THE LITIGATION
W.W. sued its insurance company for breach of contract, but the trial court granted summary judgment in the insurer's favor. On appeal, W.W. claimed there remains a genuine issue of material fact as to whether a dishonest act occurred because the insurer was unable to determine if W.W.'s former employee actually stole its tools. Assuming a dishonest act occurred, W.W. also claimed its former employee was no longer a person entrusted with the tools after W.W. demanded their return.
FACTS
W.W. employed Dante Wells from December 2017 to January 2019. During this time, Wells allowed W.W. to store its company tools on a piece of real estate Wells owned in Tippecanoe County. In exchange, W.W. allowed Wells to use the tools for "side work" in his own name.
In March 2019, after Wells stopped working for W.W., the company demanded that Wells return the tools stored on his property. When Wells refused, W.W. reported the tools as "stolen" to the Tippecanoe County Sheriff's Department and sued Wells for replevin. Wells eventually returned what he claimed were all of W.W.'s tools. But upon inventorying the returned items, W.W. determined that "a lot of tools" were missing. W.W. therefore submitted an insurance claim to its insurance company, alleging Wells stole the missing tools.
The Insurer investigated W.W.'s insurance claim by interviewing Williams and Wells about the loss. Williams assumed the tools were still in Wells's possession, but he did not "know that for a fact." If Wells no longer had the tools, Williams had "no idea what happened to them."
The Insurer was not able to determine if Wells actually stole W.W.'s tools. Regardless, the Insurer concluded W.W.'s loss was excluded from the Policy's insurance coverage and denied W.W.'s insurance claim on the two alternative bases.
THE POLICY
At all relevant times, W.W. Contracting, Inc. was the named insured on a commercial insurance policy (the Policy) issued by Pekin Insurance (the Insurer). Among other things, the Policy provided coverage for "accidental loss" to W.W.'s tools. The Policy, however, also contained the following exclusions: “Dishonest Act/Entrusted Person, We will not pay for a 'loss' caused by or resulting from dishonest acts by anyone entrusted with the property.” It also excluded “Unexplained Disappearance We will not pay for a 'loss' caused by or resulting from unexplained disappearance."
DISCUSSION
W.W.'s allegation that Wells stole its tools established the occurrence of a dishonest act for purposes of the Insurer's motion for summary judgment. Wells was also a person entrusted with W.W.'s tools.
In raising the exclusions as affirmative defenses, the Insurer essentially accepted as true W.W.'s allegation of Wells's undisputedly dishonest act. Thus, to prove the dishonest act/entrusted person exclusion barred coverage of W.W.'s loss, the Insurer was only required to establish that Wells was a person entrusted with W.W.'s tools.
Wells Was a Person Entrusted with W.W.'s Tools
To "entrust" means to commit to another with confidence. W.W. does not dispute that it entrusted Wells with its tools by storing them on Wells's property during his employment with the company. In the absence of any ambiguity, the language of the Policy's dishonest act/entrusted person exclusion must be given its ordinary meaning. Nothing in the language of the exclusion requires that the dishonest act be contemporaneous with the insured's confidence in the entrusted person. The exclusion applies broadly to loss "caused by or resulting from" an entrusted person's dishonest act.
The intent of the dishonest act/entrusted person exclusion is to bar coverage for the insured's "misplaced confidence" in another. By entrusting its tools to Wells, W.W. placed its confidence in Wells not to steal the tools. This misplaced confidence resulted in W.W.'s loss. The fact that W.W. no longer had confidence in Wells at the time of his alleged theft is irrelevant under the terms of the Policy. The Court of Appeals affirmed the judgment in favor of the insurer.
ZALMA OPINION
When an insurance policy excludes certain potential losses in clear and unambiguous language a court must apply the exclusion as written. There was no question that WW entrusted the tools to Wells and claimed he either stole the tools or they disappeared mysteriously. Both potential events were excluded and the policy excluded the claimed loss.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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The Insurance Adjuster
What is an Adjuster?
Post 4748
The insurance adjuster is seldom, if ever, mentioned in a policy of insurance. The strict wording of the first party property policy sets the obligation to investigate and prove a claim on the insured.
Standard first party property insurance policies, based upon the more than a century old New York Standard Fire Insurance policy, contain conditions that require the insured to, within sixty days of the loss, submit a sworn proof of loss to prove to the insurer the facts and amount of loss.
In general, failure to file the proof within the time limited by the policy is fatal to an action upon it (White v. Home Mutual Ins. Co., 128 Cal. 131, 60 P. 666 (1900); Beasley v. Pacific Indem. Co., 200 Cal.App.2d 207, 19 Cal.Rptr. 299 (Cal. App. 1962).
Technically, if the wording of the policy was followed literally, the insurer could sit back, do nothing, and wait for the proof and if it wasn’t submitted within 60 days, deny the claim.
If the insured submits a timely proof of loss the insurer could either accept or reject the proof of loss.
If the insurer rejected the proof of loss the insured could either send a new one or give up and gain nothing from the claim. Filing suit on the policy would be difficult because the policy contract limited the right to sue to times after the proof of loss condition had been fulfilled.
Insureds and insurers were not happy with that system. It made it too difficult for a lay person to successfully present a claim. The system, as written into the standard fire policy seemed to run counter to the covenant of good faith and fair dealing that had been the basis of the insurance contract since, at least, 1766.
Most insurers recognized that their insureds were mostly incapable of complying with the strict mandate of the policy requiring a sworn proof of loss. Enforcement of the policy conditions made for unhappy insureds and the reputation of the insurer suffered.
In order to fulfill the covenant of good faith and fair dealing insurers created the insurance adjuster to fulfill its obligation to deal fairly and in good faith with the insured. The adjuster was created to assist the insured to comply with the material conditions of the policy, to thoroughly investigate the policy and the claim, to protect the interest of the insurer and protect against claims that were not due to a peril insured against or were false and fraudulent.
An Adjuster Is
An “adjuster” or “insurance adjuster” is, by statutory definition: "a person, co-partnership or corporation who undertakes to ascertain and report the actual loss to the subject-matter of insurance due to the hazard insured against. [California Insurance Code Section 14021]
A first party property adjuster is a specialist in adjusting claims brought by a person or entity insured against certain identified perils or risks of loss. The first party is the insured, the second party is the insurer, and the adjuster acts on behalf of the insurer.
Insurance companies create, by issuing an insurance policy, a contractual obligation to pay valid claims from those insured. To do so insurers understand that the person insured is not able to prove the cause and extent of loss without assistance. Therefore, insurers dispatch a person with special knowledge – the first party property adjuster – to separate fact from fiction, to establish cause and origin of the claimed loss, and determine sufficient information to enable the insurance company to determine the amounts necessary to indemnify the insured as the policy promised.
The adjuster is also present to distinguish the valid claim from a claim for which the insurance company is not liable under its policy, whether due to the terms and conditions of the policy or because of attempted fraud.
Most insurance policies issued by commercial – non-government supported – insurers accept substantial compliance with the policy conditions and require their adjusters to assist the insureds to fulfill the conditions.
As a general rule:
[W]hen an insurer gives its insured written notice of its desire that proof of loss under a policy of fire insurance be furnished and provides a suitable form for such proof, failure of the insured to file proof of loss within 60 days after receipt of such notice, or within any longer period specified in the notice, is an absolute defense to an action on the policy. [Stopani v. Allegany Co–op Ins. Co., 83 A.D.3d 1446, 920 N.Y.S.2d 559, 2011 N.Y. Slip Op. 2588 (N.Y. App. Div., 2011)]
Since the invention of the adjuster more than a century ago, the first person from the insurer that the insured meets when he or she suffers a first party property loss, is the adjuster. The claim adjuster was invented to smooth the claims process and be certain that the insured receives the indemnity promised and performs a complete and thorough investigation to avoid fraudulent claims.
How well the adjuster does his or her job will increase the reputation of the insurer and will not only keep the insured as a customer he or she will add additional customers by word of mouth.
Although most adjusters are not trained to be marketers their professionalism will act as the most effective marketing an insurer can receive better than any television ad.
Every modern claim adjuster should know that it is his or her duty to aid the insurer in its obligation to fulfill the promises made by the policy of insurance and assist the insured in presenting his or her claim to the insurer in accordance with the promises made by the insured to fulfill the conditions of the policy.
An adjuster's duties to the insured do not arise from the insurance contract. The adjuster is not a party to the contract. He or she is an employee or agent of the insurer.
Every person in the business of insurance or who are insured by a policy of first party property insurance, must understand that an insurance adjuster is a person engaged in the business of insurance to investigate and resolve insurance claims. The first party property insurance adjuster limits his or her activities to the investigation and adjustment of first party property claims like fire, lightning, windstorm, hail, theft, etc.
The acts of an adjuster within the apparent scope of his or her authority are binding on the company without notice to the insured of limitations on his powers. [English and American Ins. Co. v. Swain Groves, Inc., Fla.App.1969, 218 So.2d 453; Old Republic Ins. Co. v. Von Onweller Const. Co., 239 So.2d 503 (Fla. App. 1970)]
The duty of the adjuster is to ascertain and determine the amount of any claim, loss or damage payable under an insurance contract, and/or effecting settlement of such claim, loss or damage.
The acts of an adjuster within the apparent scope of his or her authority are binding on the company. [Old Republic Ins. Co. v. Von Onweller Const. Co., 239 So.2d 503 (Fla. App. 2 Dist., 1970)]
ZALMA OPINION
The insurance adjuster is the only person acting on behalf of the insurance company an insured will meet in person. The adjuster, as far as an insured is concerned, is the insurance company. If the adjuster acts professionally, empathetically and helps the insured prove his or her claim is the best marketing tool an insurer can have. If the adjuster ignores the insured, is annoying or difficult to deal with the insured will never deal with that insurer again and may find a need to retain counsel to sue the insurer for damages and the tort of bad faith. [Adapted from The Compact Book of Adjusting Property Claims – 4th Edition available Available as a hardcover here.Available as a Kindle Book here. Available as a paperback here
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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Fail to Read the Policy at Your Peril
Insurance Producer Only Required to Place Insurance Ordered
Five Waters Properties, LLC, appealed the trial court order granting defendants, Mark Bone and Bailey Agency Inc, summary disposition.
In Five Waters Properties, LLC, doing business as Saginaw Carbon v. Mark C. Bone and Bailey Agency Inc., No. 366075, Court of Appeals of Michigan (February 22, 2024)
BASIC FACTS
The failure of the Edenville Dam and subsequent failure of the Sanford Dam in May 2020, which resulted in a devastating flood that caused substantial damage to homes and businesses in Midland County, Michigan. Five Waters was one of the businesses affected by the flooding.
Matt Reineke on behalf of Five Waters worked with defendant Mark Bone, an independent insurance agent employed by Bailey Agency Inc, to procure a commercial insurance policy for Five Waters. Bone testified that Matt Reineke requested insurance for his business. He did not recall the specific language of the request. In order to determine adequate coverage amounts, he visited Five Waters' facility and walked through it with Matt Reineke. According to Matt Reineke, he determined the value of the equipment and provided that information to Bone. The coverage limits were determined using replacement value. Like Bone, Matt Reineke did not testify as to any specific language that he used when requesting insurance for Five Waters. Following the on-site meeting, Bone procured a commercial insurance policy for Five Waters that had replacement coverage for Five Waters' equipment in the amounts determined by Matt Reineke.
Shortly after the policy was purchased in 2017, the Midland area experienced flooding. Bone sent a letter to the Reinekes, advising them that, in light of the recent flooding, it was "important that we review your policy with you." The letter added that some customers had been unaware of their coverage for water back-up and noted that it would be the "perfect time" to review to ensure "the appropriate amount of coverage." The Reinekes were advised to contact defendants to schedule a review. Although Julie Reineke was aware of the flooding, Matt Reineke did not recall receiving the letter from defendants in 2017. Ultimately, the Reinekes did not contact defendants to review Five Waters' policy.
Five Waters' commercial insurance policy was renewed in 2018, 2019, and 2020. Each year they received correspondence inviting them to schedule a review of Five Waters' policy with defendants. They did not do so. Moreover, they did not fully read the policy procured for Five Waters by Bailey Agency.
After the 2020 flooding, Matt Reineke contacted Bone. It was at that time that he learned from Bone that Five Waters did not have flood insurance. He stated that he was "completely shocked" because he thought that the business was covered. He later read his policy, however, and it clearly provided that damages caused by flooding, including flooding damage occurring as the result of a dam failure, was expressly excluded from the policy. Five Waters filed a claim with their insurance company, but, because the damage caused by the flood was excluded from its coverage, the claim was denied.
ANALYSIS
To establish a prima facie case of negligence, a plaintiff must prove four elements:
a duty owed by the defendant to the plaintiff,
a breach of that duty,
causation, and
damage.
Generally, an insurance agent owes a duty to procure insurance coverage requested by an insured. Further, an insurance agent does not generally owe a duty to advise an insured as to the adequacy of its insurance coverage.
In this case, Five Waters contends that the no-duty-to-advise rule applies only to captive insurance agents, not to independent insurance agents. The Court, however, has rejected that proposition in multiple unpublished opinions.
The Plaintiffs asked the Court of Appeal to eliminate the general no-duty-to-advise rule and replace it with a rule that would impose a duty to advise in cases such as the Five Waters case which, to be perfectly clear, would apparently be all cases concerning the purchase of insurance.
The Court of Appeals declined to do so in light of the public policy established by the Legislature's active role in this area and the previously noted compelling reasons that militate against the imposition of such a duty.
Five Waters asserts that a duty to advise arose because Bone assumed an additional duty by either express agreement with or promise to Five Waters. In support, Five Waters points out that Bone performed an on-site inspection to assess the risk to Five Waters and that Bone had direct knowledge that the area had previously flooded. Five Waters argued that, as a result, Matt Reineke was "left with the impression and confidence that his business was fully covered." Yet, there is no record evidence suggesting that Bone expressly agreed to assume an additional duty to advise or that he expressly promised Five Waters that he assumed such an additional duty. The fact that Matt Reineke had the impression that he was fully covered does not create a special relationship.
Because there is no special relationship between defendants and Five Waters, the Court of Appeal concluded that defendants did not have a duty to advise Five Waters as to the adequacy of its coverage.
In this case, Five Waters never requested flood insurance. And, as indicated above, defendants did not have a duty to advise Five Waters that its coverage might be inadequate as the result of not obtaining flood insurance.
Five Waters' expert testified that Bone's community involvement elevated his knowledge of the flooding issues in the area. He opined that, as a result of that elevated knowledge, Bone "probably" had a higher standard of care than other insurance agents.
In sum, the trial court properly determined that no genuine issue of material fact precluded granting summary disposition for defendants. The trial court correctly determined that defendants did not owe Five Waters a duty to assess and ensure the adequacy of the business insurance coverage and Five Waters failed to establish a special relationship that gave rise to a duty to do so.
ZALMA OPINION
When insureds suffer a loss that is not covered by the policy they purchased they seem intent on suing the insurance producer who failed to force the insured to purchase a policy that would cover the loss different from the policy they purchased. They sue the insurance producer and find that case law in almost every state only requires the producer to place the insurance required. Although the producer asked the Plaintiff to review their coverages because of potential flood risks they did not until their property was damaged by a flood. Too little too late.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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Insurance Policy Warranties
Warranties
Certain policies contain the term “warranty.” This is a word of great power. Generally, a warranty can be defined as follows:
A “warranty” in insurance law is a statement or condition forming part of a contract whereby insured agrees that certain acts have been or shall be done, and validity of contract depends upon exact fulfillment of condition, regardless of whether breach relates to or causes loss sustained.
A warranty in an insurance policy is a special kind of representation where the person seeking insurance promises that the statements of fact are absolutely true, that they know that the insurer is relying on the truthfulness of the statements, and that each statement of fact is material to the decision of the insurer to insure or not to insure. Warranty has also been described as follows: The term “warranty” ... frequently has the connotation of an affirmation or a promise. However, functionally the significance of a warranty in an insurance policy has been, and continues to be, that it establishes a condition precedent to an insurer’s obligation to pay.
When an application for insurance is attached to the policy and made a part of it, the statements of fact in the application are converted from mere representations to warranties. By accepting the policy with the application attached, the insured acknowledges that it has warranted to the insurer that each statement of fact in the application is absolutely true and that the policy will be void if not true.
An insurance company can extract from the insured a warranty of any factual matter it considers material and may reasonably provide for voidance of the contract if such warranties prove false. To do so, however, it must be stated clearly and unambiguously on the face of the policy.
The United Kingdom Insurance Act of 2015 abandoned the literal compliance rule, so that rescission is no longer the automatic remedy for breach of warranty. Instead, a breach only suspends coverage until it is cured. In addition, an insured who breaches a warranty and fails to cure can recover if it “shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred. [Travelers Prop. Cas. Co. of Am. v. Ocean Reef Charters LLC (11th Cir. 2021)]
Failure to comply with a warranty can convert a clearly covered and compensable claim into one that must be rejected. It is therefore imperative that the adjuster understand what a warranty is and how it affects the investigation and adjustment of a claim.
New York’s Insurance Law defines a “warranty” as:
any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer’s liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage of the contract. [N.Y. Ins. L. § 3106(a); Kephart v. Certain Underwriters at Lloyd’s of London (S.D. N.Y., 2019)]
In Certain Underwriters at Lloyd’s London v. Jimenez, 197 So.3d 597 (Fla. App. 2016) those Certain Underwriters at Lloyd’s London (“Lloyd’s”) appealed a final judgment following a non-jury trial, in which the trial court granted declaratory relief to Raul and Ada Jimenez, the appellees/homeowners, and determined that Lloyd’s was not entitled to rescission of the property insurance policy issued to the homeowners.
In 2007 Raul Jimenez, on behalf of himself and his wife, Ada Jimenez, completed and executed an application for homeowner’s insurance policy on their home built in 1985, with assistance from their insurance agent, A & A Insurance Underwriters (“A & A”). A & A submitted the Jimenez’s homeowner’s insurance application to a managing general agent of Lloyd’s. During the application process, A & A asked whether Mr. Jimenez had a smoke, temperature or burglar alarm, and if so, whether these alarms were monitored. Mr. Jimenez said he had a monitored central station alarm on the property. On the application form, Mr. Jimenez designated the central station monitor as a protection device that monitored for smoke, temperature, and burglary. After signing the application, Mr. Jimenez was given a copy and was given a chance to ask questions and make sure his answers were true and correct. The policy was given a discount because of the representation that the Jimenezes had a central station alarm monitoring for smoke, temperature, and burglary.
The policy was renewed three times with the same representation and warranty about the alarm system.
In August 2009, there was a kitchen fire at the Jimenez’s home.
Delta Alarm Systems monitored and maintained the Jimenez’s alarm system. At trial, Jose Quintero, the corporate representative of Delta Alarm Systems, testified that the Jimenezes had a burglar alarm but not a central station monitored smoke or temperature alarm system. Lloyd’s expert testified why the alarm warranty was material.
New York law has long provided that “the breach of an express warranty [in a marine insurance policy], whether material to the risk or not, whether a loss happens through the breach or not, absolutely determines the policy and the assured forfeits his rights under it.” [Cogswell v. Chubb, 1 A.D. 93, 36 N.Y.S. 1076, 1077 (1st Dept.1896) (navigation limit warranty), aff’d, 157 N.Y. 709, 53 N.E. 1124 (1899)]. As New York’s Court of Appeals has explained, an express warranty in a marine insurance policy “must be literally complied with, and that noncompliance forbids recovery, regardless of whether the omission had a causal relation to the loss.” [Jarvis Towing & Transp. Corp. v. Aetna Ins. Co., 298 N.Y. 280, 82 N.E.2d 577, 577 (1948)]
ZALMA OPINION
A "warranty" in an insurance policy is an important and enforceable promise made by the insured to the insurer as an inducement to issue the policy. A failure to fulfill the warranty voids the coverage. In Marine Insurance a key warranty is a warranty of seaworthiness while in land based policies the warranties one sees are usually warranties of security like burglar or fire alarms, sprinkler systems, the need for a safe or a security guard, or regular inventories. All are important to the risk and must be met and fulfilled by the insured for coverage to apply.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
Please tell your friends and colleagues about this blog and the videos and let them subscribe to the blog and the videos.
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Go to Newsbreak.com https://www.newsbreak.com/@c/1653419?s=01
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Go to the Insurance Claims Library – https://lnkd.in/gwEYk
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Zalma's Insurance Fraud Letter - March 1, 2024
ZIFL Volume 28, Issue 5, March 1, 2024
The Source for the Insurance Fraud Professional
Subscribe to ZIFL https://visitor.r20.constantcontact.com/manage/optin?v=001Gb86hroKqEYVdo-PWnMUkcitKvwMc3HNWiyrn6jw8ERzpnmgU_oNjTrm1U1YGZ7_ay4AZ7_mCLQBKsXokYWFyD_Xo_zMFYUMovVTCgTAs7liC1eR4LsDBrk2zBNDMBPp7Bq0VeAA-SNvk6xgrgl8dNR0BjCMTm_gE7bAycDEHwRXFAoyVjSABkXPPaG2Jb3SEvkeZXRXPDs%3D
Zalma’s Insurance Fraud Letter (ZIFL) continues its 28th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/
The current issue can be read in full athttp://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf and includes the following articles:
Bloods Gang Member Guilty of RICO to Defraud Insurers
Gangs Took Over Fire Reconstruction Industry in New York
Insurance Fraud is a Violent Crime
Jatiek Smith (also known as “Tiek”) a member of the Bloods Gang was charged with one count of racketeering conspiracy, in violation of 18 U.S.C. § 1962(d), and one count of extortion conspiracy, in violation of 18 U.S.C. § 1951, arising out of allegations that Smith and his co-conspirators engaged in a pattern of extortionate conduct to dominate the fire restoration industry. Smith’s case was tried in a ten-day bench trial between November 27, 2023, and December 11, 2023.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
More McClenny Moseley & Associates Issues
This is ZIFL’s twenty fourth installment of the saga of McClenny, Moseley & Associates and its problems with the federal courts in the State of Louisiana and what appears to be an effort to profit from what some Magistrate and District judges indicate may be criminal conduct to profit from insurance claims relating to hurricane damage to the public of the state of Louisiana.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
A New Book: "Once Upon A Claim"
From my friend Chantel M. Roberts whose site lists all her books, and a new author, George Jack – from the Insurance Academy.
https://www.tiltingatwindmillspress.com/ and whose blog you can read at: https://www.tiltingatwindmillspress.com/post/unlocking-insurance-wisdom-with-illustrated-fairy-tales-once-upon-a-claim where she explains the illustrations.
Picture this: classic fairy tales, nursery rhymes, and fables brought to life with whimsical illustrations and sprinkled with valuable lessons about insurance concepts and claims processes. It may sound like a magical dream, but it’s a reality with the upcoming book, Once Upon A Claim: Fairy Tales to Protect Your Ass(ets).
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
Go To Jail, Do Not Pass Go, Stay in Jail
Insurance Agent Defrauded Clients by Keeping Premium for His Own Benefit
In United States Of America v. John M. Thomas, a.k.a. John Thomas, No. 23-11137, United States Court of Appeals, Eleventh Circuit (February 20, 2024) Thomas appealed from his 168-month sentence for 16 counts of wire fraud, 4 counts of money laundering, and 4 counts of money laundering to conceal proceeds of unlawful activity.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
Barratry
Use of cappers or runners to sign up clients for lawyers is a form of barratry and a type of fraud. Barratry is a very dirty word in the legal profession. Barratry is the vexatious incitement to litigation, typically by soliciting potential legal clients.Stated otherwise, barratry occurs when a lawyer or someone acting on a lawyer’s behalf improperly solicits someone to be a plaintiff in a lawsuit.Think ambulance chasing.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
From the Coalition Against Insurance Fraud
Enfield woman sentenced for larceny in Medicaid case. Marcy L. Taliceo, from Enfield, pleaded guilty this week in Hartford Superior Court to one count of Larceny related to Medicare fraud. Between 2016 and 2020, Taliceo was billing the state Medicaid program for services done by unlicensed personnel and services that were never provided. Taliceo was President, Treasurer and Secretary of Growing Potential Services, a Connecticut Medical Assistance Program (CMAP) provider that was enrolled as a Behavioral Health Clinician Group. Taliceo was in charge of all aspects of the business, including what services were billed. Growing Potential was paid by the Connecticut Medicaid Program for psychotherapy services by unlicensed individuals in the amount of almost $142K. In addition, Growing Potential was paid a total of nearly $7K for these services. Taliceo was sentenced to four years in prison, execution suspended, with five years of probation. In addition, restitution for the stolen amount must be paid back in full.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
Health Insurance Fraud Convictions
Holy Health Care Services, LLC Program Administrator Sentenced to Five Years in Federal Prison for a Health Care Fraud
Lambert Mbom, age 50, of Riverdale, Maryland, was sentenced by U.S. District Judge Paula Xinis to five years in federal prison, followed by three years of supervised release, for conspiracy to commit health care fraud and wire fraud and for conspiracy to make false statements relating to health care matters in connection with a scheme to fraudulently bill Medicaid. The defendant’s conviction stems from a scheme involving services purportedly provided by Holy Health Care Services, LLC (“Holy Health”), a mental health services provider with locations in Washington, D.C. Judge Xinis also ordered Mbom to pay restitution in the full amount of the loss, $4,450,588.66. The sentence was imposed on February 8, 2024.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
New Book Now Available from Barry Zalma
"Property Investigation Checklists: Uncovering Insurance Fraud, 14th Edition"
Property Investigation Checklists: Uncovering Insurance Fraud, 14th Edition provides detailed guidance and practical information on the four primary areas of any investigation of suspicious claims. The book also examines recent developments in areas such as arson investigation procedures, bad faith, extracontractual damages, The fake burglary, and Lawyers Deceiving Insurers, Courts & Their Clients During, Catastrophes—A New Type Of Fraud and the appendices includes the NAIC Insurance Information and Privacy Protection Model Act and usable forms for everyone involved in claims and will provide necessary information to the claims adjuster, SIU fraud investigator, claims manager, or coverage lawyer so he or she can be capable of excellence.
The newest book joins other insurance, insurance claims, insurance fraud, and insurance law books by Barry Zalma all available at the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/
Other Insurance Fraud Convictions
Illinois Insurance Agent Sentenced to 7 Years in Prison for Swindling Premiums
Daniel M. Rosenbaum owned and operated Alexander & Rosenbaum Financial Group LLC, an insurance agency in Kenilworth, Ill. Beginning in 2016, Rosenbaum collected more than $1 million in annuity premiums from at least 18 clients, including friends and family members, for policies that he never purchased.
Rosenbaum, the owner of a suburban Chicago insurance agency has been sentenced to seven years in federal prison for swindling more than $1 million from clients by collecting annuity premiums for policies that he never purchased, the U.S. Attorney’s Office, Northern District of Illinois announced last week.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
Ignore Court Orders at Your Peril
Frivolous Litigation and Frivolous Appeal Causes Default to Be Entered
PROOF OF FRAUDULENT CLAIM REQUIRED SUIT
Plaintiff-Appellee Transamerica Life Insurance Company (“Transamerica”) sued Defendants-Appellants Akop Arutyunyan and his daughter Anahit Arutyunyan for allegedly engaging in a conspiracy to defraud Transamerica into paying benefits under a long-term care insurance policy.
In Transamerica Life Insurance Company v. Akop Arutyunyan; Anahit Arutyunyan, No. 22-55199, United States Court of Appeals, Ninth Circuit (February 22, 2024) Transamerica sued to avoid paying benefits to a fraudulent disability claim.
You can read the full article and all of this issue of ZIFL at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-03-01-2024.pdf
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Go To Jail, Do Not Pass Go, Stay in Jail
Insurance Agent Defrauded Clients by Keeping Premium for His Own Benefit
Post 4745
In United States Of America v. John M. Thomas, a.k.a. John Thomas, No. 23-11137, United States Court of Appeals, Eleventh Circuit (February 20, 2024) Thomas appealed from his 168-month sentence for 16 counts of wire fraud, 4 counts of money laundering, and 4 counts of money laundering to conceal proceeds of unlawful activity.
FACTS
Between April 22, 2013, and February 16, 2021, Thomas defrauded 69 of his clients at Thomas Insurance LLC in Pensacola, Florida, through premium diversion. Thomas collected insurance premiums from his clients and falsely represented to them that he purchased insurance policies. Thomas provided his victims with fraudulent insurance documents indicating the fake policies were in effect. He also falsely represented to one victim that he had obtained an annuity by providing a fraudulent contract and portfolio summary.
After Hurricane Sally hit the Gulf Coast in 2020, several of Thomas's victims learned they were uninsured as they sought to file claims for hurricane damage to their property. Through premium diversion, Thomas received payments of at least $4.8 million from his victims and his fraud caused at least $2.2 million in unpaid claims caused by hurricane, fire, and liability losses. When one victim attempted to submit a claim, Thomas directed the victim to send photos and damage estimates to a fake Colorado company he created: "JSSK Risk Advisors, LLC." Thomas pretended to be an insurance adjuster named "Scott Powrie" at JSSK Risk Advisors to "deny" the victim's claim.
Thomas was indicted on 16 counts of wire fraud. These violations involved the following four transactions:
$50,000 transfer from his bank account to his Family Trust bank account, then transferred to purchase a Lexus;
$278,730.14 transfer from his bank account to his Family Trust bank account, then transferred to purchase a condominium on Pensacola Beach, Florida;
$30,469.80 check from his bank account to exchange for 20 one-ounce gold coins;
$97,557.19 transfer from his bank account to an E*Trade brokerage account.
Thomas pled guilty to all 24 counts after the magistrate judge conducted a colloquy with Thomas to ensure that he was pleading guilty knowingly and voluntarily. At his sentencing hearing, Thomas's counsel objected to the sophisticated means enhancement, among other things. Counsel described Thomas's fraud as "incredibly simple" and stated Thomas's ability to go undetected for almost eight years stemmed from Thomas's special skill and the vulnerability of his victims, not sophistication. The court overruled all of Thomas's objections, including for sophisticated means.
ANALYSIS
Evidence that a defendant converted funds into a form that is more difficult to trace, easier to hide, or less suspicious can support a violation of § 1956.
Thomas has not shown that the error impacted his substantial rights. Even if he could show that he would not have pled guilty, changing the outcome of his convictions on Counts 21, 22, and 24 would not impact the enhancement for violating § 1956, which only requires one conviction under that statute. See U.S.S.G. § 2S1.1(b)(2)(B).
An offense that "involved sophisticated means and the defendant intentionally engaged in or caused the conduct constituting sophisticated means" should result in a two-level increase. Regardless of its elements, the scheme itself may be designed in a sophisticated way that makes it unlikely to be detected, allowing it to continue for an extended period and to impose larger losses. Even schemes with a sole participant can employ sophisticated means.
The Eleventh Circuit concluded that the district court did not clearly err in applying the sophisticated means enhancement. Thomas's fraudulent scheme must be considered in its totality. Thomas made them in a way that created a sophisticated scheme. Thomas created fraudulent insurance documents and fabricated an annuity portfolio. In addition, Thomas made up an email address for his alias "Scott Powrie" at the fake "JSSK Risk Advisors, LLC" to deny one of his victim's insurance claims for a policy that never existed.
On his own, Thomas managed to conceal his fraud for over seven years and cause millions of dollars in losses. In light of our precedent and Thomas's actions, the district court did not clearly err in applying the two-level sophisticated-means enhancement.
ZALMA OPINION
Thomas, as an insurance agent, decided he was better at being an insurance company than an insurance company. He took in premiums from his friends and neighbors, never purchased the insurance they needed, denied their claims, and pocketed millions of dollars. When finally caught after a hurricane struck and his clients had no insurance, he pleaded guilty only to try to reduce his sentence in an amazing type of chutzpah by claiming his seven years of stealing was not sophisticated. He will serve his time in the gray bar hotel.
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Ignore Court Orders at Your Peril
Frivolous Litigation and Frivolous Appeal Causes Default to Be Entered
Post 4744
PROOF OF FRAUDULENT CLAIM REQUIRED SUIT
Plaintiff-Appellee Transamerica Life Insurance Company ("Transamerica") sued Defendants-Appellants Akop Arutyunyan and his daughter Anahit Arutyunyan for allegedly engaging in a conspiracy to defraud Transamerica into paying benefits under a long-term care insurance policy.
In Transamerica Life Insurance Company v. Akop Arutyunyan; Anahit Arutyunyan, No. 22-55199, United States Court of Appeals, Ninth Circuit (February 22, 2024) Transamerica sued to avoid paying benefits to a fraudulent disability claim.
FACTS
In March 2016, Transamerica issued a life insurance policy to Anahit, which covered her father, Akop, as the "Insured." The policy included a "Comprehensive Long Term Care Insurance Rider," under which Transamerica generally agreed to "pay a Monthly Long Term Care Benefit when the Insured has incurred expenses for Qualified Long Term Care Services." One of the requirements for triggering this long-term care coverage was that the Insured qualify as a "Chronically Ill. Individual."
In December 2018, Akop filed a claim for benefits under the rider, alleging that he had torn his "left rotator cuff" and suffered from "spinal arthritis." The following month, a nurse conducted an "onsite assessment" of Akop at his home in order "to determine whether Akop was eligible to receive benefits under the [r]ider." Anahit also provided written confirmation to Transamerica that he hired Mr. Pzdikyan as his caregiver." In light of the information provided by Defendants, Transamerica approved the claim and began paying Akop benefits.
Over the next several months, Transamerica conducted surveillance of Akop in order to determine whether the representations made in support of the claim for benefits were accurate. The surveillance revealed that Pzdikyan never visited Akop's home, in spite of the fact that "[o]n each date of surveillance, Akop represented to Transamerica in signed and certified Proof of Loss statements that he received between three and eight hours of care services from Mr. Pzdikyan in the home."
Based on this initial surveillance, Transamerica invoked its rights under the rider to require Akop to submit to an independent medical evaluation. The doctor who performed the evaluation, Dr. Molinar, examined Akop in April 2019. Because the IME determination was sufficient to support Akop's continuing claimed eligibility for long-term care benefits, Transamerica continued paying benefits to Akop.
Further surveillance allegedly confirmed that Pzdikyan "did not provide care to Akop on the dates represented by Akop to Transamerica." Transamerica's further surveillance also purportedly showed that Akop was continuing to engage in activities that were inconsistent with his claimed level of impairment.
ABUSE OF TRIAL COURT ORDERS
Concluding that Defendants had repeatedly failed to obey court orders related to the discovery process, the district court ultimately entered default judgment against them. Defendants have timely appealed the judgment, but the Ninth Circuit concluded that their arguments in the court were frivolous. Moreover, when called upon to defend his disregard of the district court's orders, Defendants' counsel at oral argument in the court made multiple blatantly false statements about his and his clients' responses to those orders.
In May 2020, Transamerica sued Defendants, alleging that they had obtained insurance benefits through fraud. Specifically, Transamerica asserted monetary claims based on fraud, civil theft, civil conspiracy, and restitution.
Defendants filed their response to the OSC on September 13, three days late. Defendants challenged the district court's ultimate decision to enter a default judgment as a sanction for Defendants' violations of court orders.
The district court applied a measured and gradational approach in responding to Defendants' non-compliance with the court's orders and the local rules. The Ninth Circuit found it is abundantly clear that the result is obvious and the appellants arguments were wholly without merit.
Moreover, at oral argument for this appeal, Defendants' counsel repeatedly minimized, if not misrepresented, his lack of compliance with the district court's orders in this case. For example, at one point during argument, counsel asserted that, "[i]n terms of our compliance with the court's orders, at no point did we ignore or flout our responsibility to respond to discovery." It may well be that, when it comes to evaluating these multiple misstatements, this case may ultimately call for the application of what has been called "Hanlon's Razor": "Never attribute to malice that which is adequately explained by stupidity."
In view of the frivolous nature of this appeal and the multiple misstatements made by counsel at oral argument, the Ninth Circuit ordered Defendants and their counsel, by separate order filed contemporaneously, to show cause why the court should not impose sanctions against them. Defendants' counsel is likewise ordered to show cause why this court should not refer this matter to the State Bar of California.
The Ninth Circuit upheld the district court's order deeming defendants' objection to certain items of discovery to be forfeited and requiring production of those items. By failing to present any sufficient argument in their opening brief as to why the district court's stated grounds for that decision were erroneous, defendants forfeited any challenge to that order on appeal. In addition, it held that the district court did not abuse its discretion in entering a default judgment as a sanction for defendants' violations of court orders. Finally, the Ninth Circuit held that the appeal is frivolous.
ZALMA OPINION
Transamerica was the victim of a blatant fraud. Surveillance established that the disability claimed by the defendant did not exist and so Transamerica sued to end the payment of benefits to the defendants only to be met with recalcitrant defendants and defense lawyer who refused to obey any court order, lied to the trial court and to the Ninth Circuit and may find criminal charges pending and a law license in jeopardy. The actions of Transamerica actions should be emulated by every insurer faced with a fraudulent claim and the California Bar should take action against the lawyer if he cannot show good cause for his actions and the US Attorney should consider the criminal conduct.
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ADA Requires Evidence of Intentional Discrimination
ADA Allows Employer to Dismiss Employee for Good Cause
Post 4743
Jennifer Akridge appealed the entry of summary judgment for her former employer, defendant Alfa Mutual Insurance Company, on her claim brought under the Americans with Disabilities Act ("ADA"). Akridge contended that Alfa discriminated against her by terminating her to avoid paying healthcare costs related to her multiple sclerosis ("MS") and severe migraines.
In Jennifer Akridge v. ALFA Insurance Companies, ALFA Mutual Insurance Company, No. 22-12045, United States Court of Appeals, Eleventh Circuit (February 16, 2024) the Eleventh Circuit applied the "but for test" to determine if the employer discriminated against a disabled employee.
FACTUAL BACKGROUND
Alfa responded that most of Akridge's duties had become automated and her position was no longer needed Alfa eliminated it to cut business expenses. Alfa argued there was no evidence Alfa's decisionmakers knew Akridge's healthcare costs.
In 1989, Akridge began working at Alfa, an insurance company. In 1993, Akridge was diagnosed with MS and began suffering from severe migraines. By 2015, Akridge was promoted to a strategic coordinator position in Alfa's auto underwriting department. Akridge's primary task concerned the strategic underwriting program, in which she worked with Alfa's agents and district managers to identify profitable policies for struggling agents. By all accounts, Akridge excelled at her job, with excellent performance reviews.
Alfa was self-insured and paid the healthcare costs of its employees. Akridge estimated that it cost Alfa between $10,000 and $12,000 per month to treat her MS and migraines. While it was common knowledge at Alfa that Akridge had MS, no one at Alfa ever said anything to Akridge about her healthcare costs.
Decisionmakers and the Decision to Terminate Akridge
The decisionmakers discussed eliminating Akridge's position for one to two weeks before her termination.
Summary Judgment and First Appeal
Ultimately, the court entered summary judgment in favor of Alfa. The court observed that none of Akridge's evidence indicated that the decisionmakers knew her individual healthcare costs.
Second Summary Judgment Motion
Alfa filed its second motion for summary judgment, which the court granted. The court concluded that (1) while Akridge was fired and not transferred to a new position, she admitted she never applied to an open position at Alfa and (2) the decisionmakers testified that they were unaware of Akridge's healthcare costs.
The ADA bars employers from discriminating against a qualified individual on the basis of disability. On appeal, Akridge challenges the entry of summary judgment on her claim that Alfa discriminated against her by terminating her to avoid paying her high healthcare costs.
An ADA plaintiff establishes a prima facie case by showing (1) she has a disability; (2) she is a qualified individual under the ADA; and (3) the employer discriminated against her "on the basis of disability." The ADA imposes a "but-for" causation standard-that is, an adverse employment action would not have occurred but for the plaintiff's disability.
The Supreme Court has instructed that the ancient and simple “but for” common law causation test supplies the rule against which Congress is normally presumed to have legislated, including for federal antidiscrimination laws.
The employee-friendly, motivating-factor standard does not apply to ADA claims, as this standard is drawn directly from the text of Title VII. Akridge cannot resort to the lesser showing. The ADA's text requires a plaintiff alleging disparate treatment to prove that she was treated less favorably than a similarly situated, non-disabled person.
Akridge's Evidence does not Show Pretext
Alfa's decisionmakers eliminated Akridge's position to reduce business expenses because her position was no longer needed. Alfa produced non-discriminatory reasons for her termination. Alfa's interest in reducing expenses was supported by the development of Guidewire.
Akridge also failed to present evidence indicating that Alfa's reasons for her firing were pretextual. In short, Akridge has failed to present evidence that would allow a jury to infer intentional disability discrimination.
If Congress intended to retain, clarify, or add the motivating-factor standard to the ADA, it could have simply added that language, like it did in its 1991 amendments to Title VII. Instead, and in direct contrast to Title VII, Congress chose to not add the motivating-factor language to the text of the ADA. The grant of summary judgment in favor of Alfa and the sanctions award of $1,918 against Akridge were affirmed.
ZALMA OPINION
Every employer has faced the need to dismiss an excellent employee because the work the employee was doing was no longer needed by the employer. When the employee is disabled the Americans With Disabilities Act will be raised to say that the reason for the dismissal was to avoid paying her extensive medical bills. She failed to provide any evidence that the dismissal was for any reason that fell within the discrimination requirement of the ADA. Since Alfa had a good business reason for the dismissal and had no knowledge of her medical costs, the summary judgment was affirmed.
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Exclusion for Failure to Advise Insurer of Known Potential Loss
CircuThe Supreme Court, New York County (Barry R. Ostrager, J.), entered a judgment which denied plaintiffs' motion for partial summary judgment as to liability for breach of contract and sought product recall insurance coverage under a set of policies issued to plaintiffs for the period of March 7, 2018 to March 7, 2019.
The order also and granted defendants' motions for summary judgment in part, to the extent of dismissing plaintiffs' second cause of action seeking liability for breach of contract and for coverage under a set of policies issued to plaintiffs for the period of March 7, 2019 to March 7, 2020.
In Vyaire Holding Company et al. v. Westchester Surplus Lines Insurance Company, et al, North American Capacity Insurance Company, 2024 NY Slip Op 00825, Appeal No. 1595, Index No. 652428/20, No. 2022-05619, Supreme Court of New York, First Department (February 15, 2024) the appellate division affirmed the trial court.
FACTS & PRIOR NOTICE EXCLUSION
Defendants issued consumer goods insurance policies on medical devices sold by plaintiffs (collectively, Vyaire). The Year One policy ended on March 7, 2019, at which point the Year Two policy began. Each policy was triggered by an "insured event" discovered in the policy period, provided that Vyaire gave written notice as soon as possible, no later than 30 days after discovery of the event. Additionally, the policies excluded coverage for pre-existing circumstances that Vyaire "knew of or should have known of, prior to the inception of this policy, that caused or could reasonably have been expected to cause... an 'insured event'."
The "Insured event" was defined as a" 'stock recovery,' market withdrawal or recall" of an insured product that would cause bodily injury or property damage. "Stock recovery" was defined by the policies but "market withdrawal" and "recall" were not.
THE PRODUCT
enFlow, a product insured under the policy, was first approved in 2006. By 2018, it was used in many different countries. Prior to March 2019, there were no reports of patient injury due to aluminum toxicity. In February 2018, however, Vyaire learned of a (then-unpublished) study indicating that enFlow may cause aluminum toxicity when used with a certain infusion. On February 6, 2019, Vyaire learned that the infusion did not contain malate. Rather, it contained lactate, which was commonly used in medical solutions.
In early March 2019, Vyaire learned that many hospitals in the United Kingdom had ceased using enFlow, and two EU regulatory agencies expressed their intentions to take regulatory action. As a result, on March 5, 2019, Vyaire decided to suspend enFlow use in the EU. On March 7, 2019, Vyaire began to file the paperwork for a withdrawal with the FDA. On March 11, 2019, Vyaire's testing revealed unacceptable levels of aluminum leaching with many different infusions. On March 12, 2019, Vyaire notified defendants that they were about to issue a world-wide recall of enFlow and gave notice as to "all responsive policies." On March 13, 2019, Vyaire issued a global recall notification.
ANALYSIS
The Supreme Court (trial court) properly determined that coverage for Year Two was excluded under the prior notice exclusion. The record established that by March 7, 2019 Vyaire knew or should have known about circumstances that could reasonably have been expected to cause an insured event.
The Supreme Court, therefore, correctly denied both motions for summary judgment as to the Year One policy.
To establish that it satisfied the notification requirement, however, Vyaire would have to prove that it discovered the event no earlier than February 10, 2019, and gave notice as soon as possible. Before March 2019, there were no reported injuries due to aluminum toxicity from enFlow, despite its frequent and widespread use. Moreover, no regulatory agency had yet indicated any intention to recall the product.
Yet, by that date, Vyaire had engaged in extensive communications with foreign regulatory agencies for approximately a year regarding enFlow's possible aluminum toxicity.
Vyaire had also conducted its own testing regarding aluminum leaching. Vyaire knew that an infusion containing lactate, not malate, leached potentially dangerous amounts of aluminum.
The competing claims raise issues of fact as to whether Vyaire had a reasonable belief, until at least February 10, 2019, that no insured event had occurred.
ZALMA OPINION
This case teaches that every insured of a liability insurance policy should always advise the insurers when it learns of a potential of a loss that would be an insurable event under the policy. Vyaire failed when it knew there was a potential problem with the product and the danger of injury to people using the product. Vyaire failed on one policy year and potentially failed on the earlier year which the court left for trial to determine whether Vyaire had a reasonable belief until 2/10/19 that no insured event had occurred. The problem and litigation could have been resolved by a prompt notice.
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It is Time to Control Punitive Damages
Courts Should Limit Punitive Damages
Post 4741
The US Supreme Court has clearly stated that "[p]unitive damages may properly be imposed to further a State's legitimate interests in punishing unlawful conduct and deterring its repetition." [BMW of North America, Inc. v. Gore, 517 U. S. 559.] These damages often exceed the fines assessed by the state if the same person had acted criminally to damage the plaintiff.
The skills of plaintiff’s trial lawyers have convinced juries to award damages in sums that exceed the annual budget of Greece. The jury assesses the enormous damages because it becomes inflamed by the wrongful conduct of the defendant and agrees with the lawyer’s suggestion that the jury "teach the defendant a lesson" to stop it from doing the same to others. The argument has been successful in thousands of suits brought from Vermont to California and Florida to Washington.
For years punitive damage awards were unlimited. A $40 compensatory damage award resulted in a $5,000,000.00 punitive damages verdict. Some juries assessed billions of dollars in punitive damages with no constraint from the courts other than the wealth of the defendant.
In 2003 the US Supreme Court limited punitive damages in the United States when in State Farm Mutual Automobile Insurance Co. v. Campbell, 123 S.Ct. 1513, 538 U.S. 408, 155 L.Ed.2d 585 (U.S. 04/07/2003) by a 6-3 vote, overturned a $145 million verdict against an insurer. The Supreme Court concluded that a punitive damages award of $145 million, where full compensatory damages were $1 million, is excessive and violates the Due Process Clause of the Fourteenth Amendment.
Justice Kennedy, writing for the majority limited the ability of state and federal courts to award huge punitive damages awards and concluded that it was improbable that a punitive damage award more than a single digit multiplier of the compensatory damages award would seldom, if ever, pass the due process test. The Supreme Court, in BMW of North America, Inc. v. Gore, supra, set forth specific tests that must be met before punitive damages could fulfill the requirements of due process.
The State Farm Mutual Automobile Insurance Co. v. Campbell case arose out of an automobile accident where one party was killed and another severely injured. The Campbells, insured by State Farm attempted to pass six vehicles on a two-lane highway, failed, and caused the driver of an oncoming car to drive off the road to escape collision with the Campbells' vehicle. The Campbells only had $25,000 coverage per person and $50,000 in the aggregate. The Campbells felt they were not at fault because there was no contact between the two vehicles. State Farm ignored the advice of its adjuster and counsel to accept policy limits demands and took the case to trial. The verdict at trial was more than $180,000 and the State Farm appointed counsel told the Campbells to put their house on the market since they would need the money to pay the verdict. State Farm refused to pay the judgment and to fund an appeal. The Campbells retained personal counsel to pursue an appeal that was not successful, entered into a settlement with the plaintiffs where the plaintiffs agreed to not execute on their judgment in exchange for an assignment of 90% of all money received in a bad faith action by the Campbells against State Farm. Before suit was filed, State Farm paid the full judgment.
At trial, the plaintiffs brought in evidence of actions of State Farm in first party cases across the country, in third party cases not similar to the Campbells' auto accident and other evidence not related to the facts of their case.
The Supreme Court found that State Farm's "handling of the claims against the Campbells merits no praise," but concluded "a more modest punishment could have satisfied the State's legitimate objectives "instead, this case was used as a platform to expose, and punish, the perceived deficiencies of State Farm's operations throughout the country. However, a State cannot punish a defendant for conduct that may have been lawful where it occurred."
State Farm Mutual Automobile Insurance Co. v. Campbell created a major, precedent changing, limitation on the right of a jury to assess punitive damages settling limits on total amounts that can be assessed and the types of wrongful conduct a jury can consider.
In determining the constitutional maximum for a particular punitive damage award under the due process clause, we are directed to follow three guideposts:
(1) the degree of reprehensibility of the defendant’s misconduct;
(2) the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and
(3) the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.
The Ratio of Punitive Damages to Actual or Potential Harm
Punitive damages must bear a reasonable relationship to compensatory damages or to the plaintiff’s actual or potential harm. Courts must ensure that the measure of punishment is both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.
Juries are often mislead that the poor victim of an insurer’s bad faith will be able to enjoy the compensation. After paying a contingency fee to counsel and state and federal income taxes the plaintiff recovers little or nothing of the punitive damages.
ZALMA OPINION
Although punitive damages serve a public purpose and deter wrongdoers from wrongful conduct the use of punitive damages in insurance bad faith cases has, in my opinion, done little to deter wrongdoing by insurance companies.
It is time to put a stake in the heart of the tort of bad faith. Insureds who are wronged by their insurer should limit their recovery to contract damages. They should be compelled to waive the tort and sue in assumsit. If the tort of bad faith must exist it must be applied equally. The abuse of the tort of bad faith has become so extreme that the tort must be eliminated or otherwise made fair.
Adapted from my book the Insurance Bad Faith and Punitive Damages Deskbook available at fastcase.com bookstore.
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1
comment
Lie on Application & Find Policy Rescinded
MD Refused to Recognize She was Deceived and Misrepresented Facts on Application
Post 4740
Former patients of Pediatric Partners for Attention and Learning, Inc., sued the clinic and its founder, Dr. Joni Johnson, in state court after learning that the clinic's inhouse psychologist Sharonda Avery, who treated them, was actually not a psychologist at all. The insurer sued to confirm rescission because the application contained false statements.
In Medical Mutual Insurance Company Of North Carolina v. Cathy Gnik, Individually and as Mother and Next Friend of N.A., A Minor and N.L. A Minor; et al, No. 22-1994, United States Court of Appeals, Fourth Circuit (February 16, 2024)
FACTS
Pediatric Partners and Dr. Johnson asked their professional liability insurance carrier, Medical Mutual Insurance Company of North Carolina, to defend and indemnify them in the lawsuits. In response, Medical Mutual brought a declaratory judgment action in federal court, arguing that it could rescind the policy covering Pediatric Partners and Dr. Johnson because of Dr. Johnson's material misstatements in her insurance applications. The district court agreed and granted Medical Mutual's motion for summary judgment.
In 2012, Dr. Johnson founded Pediatric Partners as a multidisciplinary clinic offering medical, behavioral and cognitive services to children and adults in Virginia. That year, Dr. Johnson hired Sharonda Avery as an educational advocate, a position that did not require a license. In 2013, Avery approached Dr. Johnson about becoming Pediatric Partners' in-house psychologist, claiming that she had recently obtained a Ph.D. in General Psychology and would soon earn a Psy.D. in Clinical Psychology. However, Avery was lying.
Before Avery assumed her new role, Dr. Johnson asked Avery for proof of her license to practice psychology. When Dr. Johnson asked for proof of that license, Avery did not provide any. Avery's inability to produce a license did not stop her and although dishonest, Avery was resourceful. She provided Dr. Johnson with fake Ph.D. and Psy.D. diplomas. This apparently satisfied Dr. Johnson, so Avery began administering cognitive testing to patients while holding herself out as a psychologist.
In the spring of 2014, the Virginia Department of Health Professions ("VDHP") received a complaint that Avery was practicing psychology without a license. A VDHP investigator visited Pediatric Partners and spoke with Dr. Johnson about the complaint.
After Avery's promotion Avery told Dr. Johnson, without elaboration, that she did not think she could become permanently licensed. Even so, Dr. Johnson permitted Avery to continue providing testing and therapy services
THE APPLICATION
Later in 2017, while Avery was working part-time at Pediatric Partners, Dr. Johnson sought professional liability coverage from Medical Mutual. Dr. Johnson completed an Entity Professional Liability Application ("Entity Application") and, separately, a Medical Practitioners Professional Liability Application ("Practitioner Application"). The Entity Application included the question, "Has the Applicant or any of its employees ever been the subject of disciplinary investigative proceedings or a reprimand by a governmental or administrative agency, hospital, or professional association?" Despite knowing about the 2014 VDHP inquiry, Dr. Johnson answered, "No."
Medical Mutual issued a professional liability policy to Dr. Johnson and Pediatric Partners for a period of September 1, 2017, to September 1, 2018. But the policy had a retroactive effective date of September 1, 2012, meaning it covered claims based on conduct going back to that date.
In September 2017, Dr. Johnson terminated Avery-not because of Avery's fraud, but due to her increasing unavailability. Dr. Johnson claimed that she only learned of Avery's fraud after Avery left Pediatric Partners.
Dr. Johnson filed claims with Medical Mutual based on two complaints made to the VDHP against her. Whatever the details, there is no dispute that these complaints related to Avery's fraud. Still, Medical Mutual renewed the policy-albeit at a higher premium after identifying the complaints in the policy renewal worksheet-for a period of September 1, 2018, to September 1, 2019.
Authorities arrested Avery in 2019 on multiple state charges stemming from her fraudulent conduct. In 2020, she was convicted.
The district court granted Medical Mutual's summary judgment motion, concluding that Medical Mutual had clearly proven that Dr. Johnson's answer to the disciplinary investigative proceedings question was a material misstatement.
ANALYSIS
The Virginia Code permits an insurer to rescind an insurance policy if the insured made a material misstatement in the policy applications.
Dr. Johnson's subjective knowledge of the falsity of her representation is irrelevant. Under Virginia law, unless an insured qualified her statements as being to the best of her knowledge, or with some similar limitation, "clear proof of mere falsity of the statements [is] sufficient."
Courts in Virginia apply traditional principles of contract interpretation when reviewing insurance policies and when a policy term is unambiguous, a court will apply its plain meaning. Considering the entire phrase and its context, "disciplinary investigative proceedings" is not ambiguous.
Medical Mutual contends that the affidavits of two of its underwriters carried the burden of clearly proving the materiality of Dr. Johnson's misstatement. Both underwriters indicated that, had Dr. Johnson accurately represented that one of her employees had been the subject of a disciplinary investigative proceeding, Medical Mutual would have learned of the 2014 investigation into Avery and refused to issue the policy.
Based on the underwriters' affidavits and the renewal worksheet, the court found that Dr. Johnson's misstatement was material. Medical Mutual has clearly proven that it would have issued the policy at an increased premium if at all-had Dr. Johnson accurately represented that Avery had been the subject of disciplinary investigative proceedings.
Accordingly, there is no genuine dispute of material fact that Dr. Johnson made a material misstatement in her policy applications. The judgment was affirmed.
ZALMA OPINION
Insurance is a business of utmost good faith where neither party to the contract of insurance will do nothing to prevent the other from receiving the benefits of the contract. Dr. Johnson, in bad faith and with knowledge, lied to Medical Mutual to obtain the insurance and ignored the fact that she knew Avery was not licensed, was not a college graduate - let alone the holder of a Phd. Rescission is an equitable remedy where the court concludes it would not be fair to require an insurer to indemnify an insured who obtained the policy by misrepresentation and concealment of material facts.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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Liar, Liar, Pants on Fire
Insurance Fraud Required to Survive
The following is a fictionalized True Crime Story of Insurance Fraud from an Expert who explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers.
Post 4739
If Louie has been born fifty years earlier, he would be called a gigolo. Louie was a classically handsome man. He stood 6’2” tall, combed his black hair straight back in a style that would do a Madison Avenue advertising executive proud. His eyes were an unblinking, watery blue that seemed to caress any woman at whom he looked. He ran three miles every morning and maintained a 180-pound, lithe physique.
Louie had a pleasant personality. Everyone he met liked him. He could drink beer with the boys and sip wine with distinguished and well-bred women. He wore a tuxedo as if Calvin Klein had his body in mind when it was designed.
Louie was not smart. Louie graduated from Thomas Jefferson High School in San Jose with a solid D- average. After leaving high school Louie worked at various menial jobs from janitor to fry-cook. He seldom held a job for more than six months.
Louie loved to dance. On weekends he would drive up to San Francisco and spend every night dancing in the clubs. It was on one of these dancing adventures in San Francisco that changed Louie’s life. Louie met Toni Di Battaglia. They danced every dance until the club closed at 4:00 a.m. They danced disco, waltzes and even country and western line dances.
Toni told him she worked for the Teamsters Union out of New Jersey and visited San Francisco monthly.
When Toni learned that Louie lived in San Jose, she invited him to her hotel and their relationship blossomed. Toni was a wealthy and powerful woman in her own right. She had a husband twenty years her senior who did not understand her. Louie was her release. They were in love. Toni did not love Louie for his intelligence. She did not love Louie for his ability to communicate. Toni loved Louie because he was beautiful, a good dancer and made her look good whenever they were out together.
She knew he could not afford to live in the manner in which she had grown accustomed. A suite at the Four Seasons Hotel (where she always stayed) cost more for a night than Louie could earn in a month. Only one solution existed. She needed to support him.
At first Louie rebelled. Taking money from a beautiful woman was not proper for a virile, healthy young man. Toni was insistent and Louie succumbed to her charm.
Toni bought Louie a condominium in the Marina district. She helped Louie furnish the Condo with antiques to satisfy her taste. She would come to San Francisco for three or four days every month. Toni gave Louie $5,000 cash each month to cover his expenses while she was gone. Louie could do whatever he wanted except during the three days Toni was in town.
Louie was a happy man. He lived better than he had in his life. He went out dancing every night. All of his clothes were custom tailored. Louie and Toni were a couple.
Every time Toni would visit, she would bring a gift for Louie. He did not understand the gifts but he accepted them with the grace of a well-bred gentleman. The gifts were always personal jewelry or gifts for his condominium. One month she brought a sterling silver tea service that Toni said was a Victorian antique. Next, she brought him a sterling silver cigarette case she said the famous Russian jeweler Faberge made for the Romanov family before the Russian revolution. She would bring him sculptures, oil paintings, silver candelabra, gold and diamond jewelry, or another bauble that peaked her fancy. To impress Louie, she told him the cost of each bauble. She exaggerated since he was unsophisticated and money still impressed him. Often, she would claim a gift cost her as much as $10,000 more than she actually paid for it. Louie thought he was rich. Louie, adding up what Toni told him she paid for each item thought the value of his household goods was more than $3 million.
Since Toni was away most of each month, Louie became bored. His only passion other than dancing was sports.
He had a satellite dish installed on his condominium; Louie would religiously follow each of the various sports channels. He even watched the Spanish language sports channel although he could not understand the commentary. His knowledge of sports was catholic. He usually knew which team would win and by how much. When he explained his skill to Toni (on one of her visits), she introduced him to a bookmaker. Toni suggested that he use his knowledge to make money by betting on sporting events.
On her next visit Louie pleasantly surprised Toni. He made enough betting on sporting events that he refused her cash contribution. She suggested that Louie set up a legitimate business and sell his sporting knowledge to the public. In this way, by just selling his choices, he could avoid any potential problem with the police. Toni had no compunction about violating the law. She wanted to keep Louie safe for her pleasure.
Running the business kept Louie busy and made him more lovable to Toni. Their relationship continued for ten happy years.
On a fateful November Sunday, while watching a San Francisco 49’ers football game, a news flash interrupted the game to announce a Mafia massacre in New Jersey. Four Teamsters Union officials, allegedly members of the Tortelini crime family, had been found dead in a parked Lincoln Town Car under an overpass of the Jersey Turnpike. All had been shot three times in the head with large caliber weapons. One of the dead was Toni Di Battaglia.
Louie mourned. He no longer had a source of income and gifts. His sports business was failing. The partner he chose had taken all of the company assets and gone to Arruba. He was broke. The love of his life, who supported him for many years, was dead. He had no skills, no profession. Louie owned his condo and could mortgage it. The proceeds would keep him for a short time.
Louie needed a plan to make a large amount of money. He wanted to continue to live comfortably until he could meet someone else, like Toni, who would support him in the manner he had grown accustomed to living. The solution was his condo owners’insurance policy.
Toni had insisted that he always keep a condo owners’ policy on his condominium. His condo owners’ policy had a $400,000 limit, although Toni had led him to believe that the antiques she had given him were worth more than a few million dollars. He would just make a list describing the various items in the condominium and place beside each description the amounts that Toni told him she had paid. He would then report to the police and his insurance company that he had been robbed of items very much like the items in the house.
Neither the police nor the insurance company could prove, since Toni was dead, that he was lying. The amount claimed would be more than the policy limit. Louie was sure the Insurance Company would immediately pay $400,000.00.
Just before Christmas Louie called the police to report that two armed robbers had come to his door and, pretending to be UPS delivery men, gained entrance. Holding him captive with pistols he would say they removed from his condo more than $1,000,000 in silver, fine arts and jewelry.
Included on his list were twenty-five bronze statutes by Erte; a Georgian silver epergne; three Faberge silver and gold cigarette cases; two Faberge picture frames made of semiprecious stones, gold and silver; a Victorian sterling silver tea set; two Georgian sterling silver tea sets; a Victorian sterling flatware service for twelve; two diamond rings; and a solid gold and diamond Rolex watch. The total value of all items Louie claimed stolen equaled $1,300,000.
The insurance company assigned its staff adjuster to investigate the loss. The adjuster was a twenty-five-year-old young woman who had started the profession two years before the day Louie reported the robbery. The opulence of Louie’s condominium and his good looks blinded her. It was clear to her inexperienced eye that the house was full of lovely antiques. She had no reason to disbelieve Louie when he told her that what was still in the house was worth more than $2 million. She presented the claim to her home office and recommended, since the loss exceeded the policy limit by a factor of three, that they pay the full policy limit.
Older and wiser people resided at the insurance company home office. Before they would authorize payment of $400,000 on a claim, they wanted evidence that the values Louie asked them to pay was reasonable and substantiated. They accepted the adjusters report, as fact, that Louie got all of the items by gift. The insurance company accepted that he could not, therefore, prove ownership or value. They expected, however, that he could, by comparison to the items still present, provide enough description to allow them to establish the true value of the items stolen.
The insurance company hired a fine arts appraiser who visited with Louie. The appraiser, looking at the initial written list, knew that Louie was unsophisticated about antiques and items of art. He could not spell “Faberge” or “epergne” and seemed to have difficulty with describing his items of silver. He would describe, for instance, silver as “Victorian” and yet insist it was manufactured before Victoria took the throne; Louie claimed Sheffield silver as “sterling,” not knowing that Sheffield was famous as a center for a specific type of silver plate.
The appraiser studied the silver and other items of art Louie still had in his home. She was convinced that his claim of values was fraudulent or, at the very least, highly inflated. The values stated on Louie’s claim did not agree with any reasonable market. The items he claimed to be Faberge were undervalued by thousands of dollars. Silver items claimed to be Georgian and Victorian were overvalued by a factor of three or more in the opinion of the appraiser.
The appraiser reported his conclusions to the insurer. The insurance company home office personnel, to aid Louie in describing his property, hired an attorney experienced in fine arts. The lawyer was instructed to examine Louie under oath. The insurance company hoped the lawyer would gain more detailed descriptions of the items stolen. They expected, with professional questioning, Louie would establish the true amount of his loss. They could not pay because their appraiser told them the loss could be in a range from $40,000 to $1 million.
Louie testified for two days. He was frightened. The lawyer, although always friendly caused Louie to break out in cold sweats he hoped was not visible. He did not tell the truth about anything to the lawyer. Louie limited his descriptions of the property stolen to the list he had written before he called the insurance company. Despite how detailed the lawyer’s probing, Louie stuck to the description he had written.
When the lawyer questioned Louie’s ability to earn money to keep up the condo, he created a story to show that he had a source of income. Louie told the lawyer that Toni’s “family” sent him, after her death, an annuity of $10,000 cash every month. The money came each month in a plain brown baggage via UPS.
When the examinations under oath were finished, the insurance company and its lawyer were convinced Louie was attempting to defraud it. The lawyer, with the approval of the insurance company, advised Louie that the insurance company denied the claim.
He sued. Five years later a Superior Court jury, after hearing all of the evidence, sent him away with nothing. Although Louie was a convincing actor, the jury concluded only that Louie had been robbed. The jury concluded, also, that he had lied to the insurance company about the existence and value of the property. They gave judgment for the insurance company. It did not have to pay $400,000 to Louie. It did, however, find itself paying more than $700,000 to its lawyers and experts who made it possible for them to win the lawsuit.
Insurance fraud did not pay for Louie. Fighting fraud, however, on the surface saved his insurance company nothing. In fact, to defeat the fraud the insurance company spent more than it would have cost if it had paid his claim in full. However, Louie’s insurance company gained the reputation of being a fighter and found very few attempts at fraud in the next few years which saved it ten times what it cost to defeat Louie’s claim.
Justice was done and Louie lived happily ever after. During the trial he met Carla, a CPA with offices on the twenty-third floor of a building on California Street that his attorneys hired to prosecute his claim.
Carla took Toni’s place. Louie still lives in his condo surrounded by antiques. Whenever Carla visits, Louie receives a new bauble. Carla pays his expenses.
Louie will never again try insurance fraud.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
Please tell your friends and colleagues about this blog and the videos and let them subscribe to the blog and the videos.
Subscribe to my substack at https://barryzalma.substack.com/publish/post/107007808
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Go to X @bzalma; Go to the podcast Zalma On Insurance at https://podcasters.spotify.com/pod/show/barry-zalma/support; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – http://zalma.com/blog/insurance-claims-library.
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Insurance Fraud is a Violent Crime
A Murderer Guilty of Killing for Insurance Money Must Serve the Full Sentence 60 Year Sentence
Post 4738
CHUTZPAH: DEFENDANT KILLS GIRLFRIEND AND TRIES TO COLLECT LIFE INSURANCE
Ronald Epps, a prisoner in federal custody, filed a Motion to Vacate, Set Aside, or Correct his Sentence as well as a filing he called a Motion for Compassionate Release.
In Ronald Epps v. United States Of America, Nos. 11-CR-309-A, 12-CR-305-A, 19-CV-1021-A, United States District Court, W.D. New York (February 13, 2024)
BACKGROUND
Epps was charged in a three-count Superseding Indictment with maintaining premises for the purpose of manufacturing and distributing narcotics, with possessing a .32 caliber revolver in furtherance of drug trafficking, and with possession while a previously convicted felon of the same firearm. In addition the narcotics and firearms charges arose after a search warrant was executed as part of the investigation of the murder of Ms. Moss by a gunshot to the back of her head. Epps was later charged with seven additional offenses, beginning with wire fraud for executing a scheme fraudulently to collect the proceeds of a life insurance policy on the life of Ms. Moss; with mail fraud for executing a fraudulent scheme to collect proceeds of a renter's insurance policy covering the premises, after the premises had twice been damaged by intentionally set fires; and with five specific arson-related offenses in connection with those two fires.
A jury trial was conducted before the USDC and the jury returned guilty verdicts on all counts. Epps was sentenced to an aggregate term of 60 years in prison; the final judgment was entered on January 4, 2017. Epps, Pro se, timely filed a motion to vacate, set aside or correct sentence.
THE TRIAL EVIDENCE
The trial evidence showed that Epps drove Ms. Moss to her job at a health-care facility on California Road in Orchard Park, New York, on August 27, 2009. After Ms. Moss's body was found on the morning of August 28, 2009, police conducted a search of Epps's residence at 21 Cascade Drive and found and seized the .32 caliber revolver underlying the two charged firearms offenses set forth in the Indictment. Evidence about Epps's actions and the statements involving a so-called “bag of guns” tended to explain why the 9 mm firearm used to shoot Ms. Moss in the back of the head was not recovered by law enforcement when they searched Epps's residence.
DISCUSSION
Defense counsel's strategic decision to agree to the consolidation of the two indictments in hopes that it would influence the Court to grant her motion to sever and allow her to try at least one indictment free of any evidence regarding Epps's possession of firearms was reasonable. Notwithstanding that such strategy was rendered unsuccessful by virtue of this Court's decision to consolidate and not sever such outcome hardly renders defense counsel's performance constitutionally ineffective.
With the direct appeal establishing the legal correctness of the Court's evidentiary ruling, the Court further found that a single, apt analogy referenced by the Court- outside the presence of the jury-in conjunction with its ruling does not, based on Epps's disapproval alone, constitute partiality. Judicial rulings alone almost never constitute a valid basis for a bias or partiality motion.
EPPS IS NOT ENTITLED TO COMPASSIONATE RELEASE
A court may not modify a term of imprisonment once it has been imposed except pursuant to statute. Epps failed to establish-as he must-that extraordinary and compelling reasons warrant reduction of his sentence. Finally, Epps has failed to establish-as he must-that the applicable sentencing factors under §3553(a) do not, on balance, cut against any reduction. Based on those deficiencies, his motion for compassionate release was denied.
ZALMA OPINION
I have been told by prosecutors over the last 55 years that they don't want to prosecute insurance fraud because they need the time to prosecute violent criminals. Mr. Epps killed his girlfriend to collect insurance money while simultaneously setting fires to profit from his crimes. Two violent crimes, arson and murder, resulted in a sentence of 60 years only to waste the time of the court with a pro se motion to set aside the judgment because the judge was prejudiced against him, his lawyer was inadequate, and he needed to be released from prison. Fortunately for the public of the USA his ploys failed and he will stay in prison for the next 60 years because insurance fraud is either a violent crime or the reason for two violent crimes.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
Please tell your friends and colleagues about this blog and the videos and let them subscribe to the blog and the videos.
Subscribe to my substack at https://barryzalma.substack.com/publish/post/107007808
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Bloods Gang Member Guilty of RICO to Defraud Insurers
Gangs Took Over Fire Reconstruction Industry in New York
Post 4736
Insurance Fraud is a Violent Crime
Jatiek Smith (also known as “Tiek”) a member of the Bloods Gang was charged with one count of racketeering conspiracy, in violation of 18 U.S.C. § 1962(d), and one count of extortion conspiracy, in violation of 18 U.S.C. § 1951, arising out of allegations that Smith and his co-conspirators engaged in a pattern of extortionate conduct to dominate the fire restoration industry. Smith's case was tried in a ten-day bench trial between November 27, 2023 and December 11, 2023.
In United States Of America v. Jatiek Smith et al., No. 22-cr-352 (JSR), United States District Court, S.D. New York (February 14, 2024) the USDC found Smith guilty on all courts in a lengthy and detailed opinion.
FINDINGS OF FACT
Based on the record presented at trial the Court made the following findings of fact
The Fire Restoration Industry
The “fire restoration industry” refers to the businesses that redress and repair properties that have suffered damage from fires or exposures to fires. Within this industry, “fire restoration companies” (sometimes referred to as “emergency mitigation services companies,” or simply “fire mitigation companies” or “restoration companies”) provide emergency mitigation services, demolition, and construction services to properties that have suffered such damages.
Another group of participants in the fire restoration industry are the “public adjusters.” A public adjuster represents the property owners in their claims made against the insurance companies that insure their properties.
The term “chasing fires,” as conventionally used in the industry, refers to a fire mitigation company's or public adjuster's efforts to solicit business from the owners of fire-damaged properties.
Both public adjusters and restoration copaMnies will chase fires in an attempt to be the first to sign any given fire.
Smith's Rise Within First Response
“First Response” is a fire mitigation company at the center of this action. Carl Walsh, the owner and founder of First Response, hired Jatiek Smith in approximately October 2019. While Walsh retained legal ownership of First Response, in practice Smith effectively took control over many aspects of the business from Walsh and by early 2020 was understood to be its leader. Smith is a member of the Bloods street gang.
Clash with AES
When Smith joined First Response, American Emergency Services (“AES”) was First Response's primary competitor. A fight ensued, and someone from AES fired a gun at Jackson.
On May 5, 2020, Smith, along with Jackson and three other members of the Enterprise, went to an AES warehouse to assault AES's owners in retaliation for the events of the prior day.
The Enterprise Imposes Rules on the Industry
After AES left the industry, Smith imposed a set of rules on fire restoration companies that had once competed.
The Enterprise Enforces Its Rules Through Violence and Threats of Violence
Multiple people adverse to Smith were assaulted by his organization.
INSURANCE FRAUD
The vast majority of work performed by First Response and other restoration companies is paid for by insurance companies. If insurance companies do not pay for any restoration work, as a practical matter that work will frequently go uncompensated, as home owners are rarely in a position to pay. Restoration companies such as First Response therefore have a strong financial incentive to ensure any insurance claim is accepted.
When First Response, under Smith's leadership, saw illegal conditions in a property, at times it used the fact of those conditions as a tool to get Public Adjuster Peralta retained. When First Response, under Smith's leadership, saw an illegal condition that could interfere with an insurance claim, employees would remove or effectively cover-up that condition and conceal it from the insurance carrier. As a result of fraud claims excluded were paid by the insurance carriers.
OBSTRUCTION OF OFFICIAL PROCEEDING
Before learning that Walsh was speaking with federal investigators, Smith directed Walsh to meet Smith in Smith's car. Smith eventually tricked Walsh into revealing that Walsh had spoken to law enforcement.
CONCLUSIONS OF LAW
Extortionate Conspiracy
The Government has proved numerous instances in which Smith and his co-conspirators confirmed their agreement by actually carrying out such extortion. Specifically, of the six specific instances in which the Government alleges that Smith and his co-conspirators carried out such extortions, namely the alleged extortions AES (McKenzie), ServPro (Vargas), EFS (Boryk), Willon Charles, iFlood, and an unnamed contractor during the “mala sagure incident,” the Court found the Government proved beyond a reasonable doubt that the first four extortions occurred in furtherance of an agreement-to-extort entered into by Smith and his co conspirators.
Specifically, the Court concluded as follows: The Government proved beyond a reasonable doubt that Smith and his co-conspirators agreed to extort McKenzie and AES in at least two respects. First, Smith and other members of the Enterprise attempted to extort McKenzie and AES by demanding that AES pay $100,000 to continue chasing fires. In addition Smith and his co-conspirators successfully extorted AES by forcing them out of the fire chasing business. Accordingly, the Court concluded that Smith and other members of the Enterprise agreed to extort AES.
It was virtually undisputed at trial that AES stopped chasing fires after these events occurred. The Court concluded beyond a reasonable doubt that AES exited the industry as a result of violence and threats of violence perpetrated by Smith and his co-conspirators.
The Government presented evidence from numerous witnesses of at least six specific acts of intimidation carried out by Smith and his co-conspirators against participants in the industry, in addition to the violence against AES described above. These include the threats or acts of intimidation.
The evidence of specific assaults against public adjusters who refused to give fires to Smith and his co-conspirators support an inference that assaults would also have been carried out on other companies that attempted to take away fires from the Enterprise.
RICO CONSPIRACY
The essence of a RICO conspiracy is the existence of an agreement to violate RICO's substantive provisions. RICO conspiracy was established by proof of: (a) of an agreement to join a racketeering scheme, (b) of the defendant's knowing engagement in the scheme with the intent that its overall goals be effectuated, and (c) that the scheme involved, or by agreement between any members of the conspiracy was intended to involve, two or more predicate acts of racketeering.
Predicate Acts of Extortion.
The Court concluded that the Government proved beyond a reasonable doubt that Smith and other members of the Enterprise agreed to, and in fact did, commit predicate acts of Hobbs Act extortion on numerous occasions during the specified period as part of a larger pattern of racketeering activity.
Predicate Act - Mail & Wire Fraud.
The Government proved beyond a reasonable doubt that members of the Enterprise conspired to, and in fact committed, mail and wire fraud by submitting, or assisting others to submit, false and fraudulent insurance claims on a continuing basis during the specified period. In short, Smith is independently guilty of the RICO conspiracy because of the conspirators' agreement to commit a pattern of mail and wire fraud, as clearly evidenced by their continuing engagement in that fraud.
VERDICT
For the reasons set forth above, the Court finds the defendant guilty of Count One and Count Two charged in the Indictment in the above-captioned case.
ZALMA OPINION
Insurance fraud is a violent crime when infiltrated and conducted by members of a violent street gang like Smith and the Bloods gang. They took over the fire reconstruction industry in New York by assaulting, threatening, and controlling public insurance adjusters and fire reconstruction contractors all in an effort to defraud insurers and victims of fire (whether accidental or intentional) and profit from organized crime efforts. The federal investigators and prosecutors have acted to protect the public and their insurers from criminal conduct and forced normally honest people into either joining in the criminal scheme or give up their business.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
Please tell your friends and colleagues about this blog and the videos and let them subscribe to the blog and the videos.
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Why to Never Take an Assignment of Claim Against Insurer
Burning Limits Policy Defeats Attempt to Collect $60,000,000 Verdict
Post 4736
Unless There is Coverage or Evidence of Bad Faith Assignment Useless
FACTUAL BACKGROUND
In Kevin Julmist, et al v. Prime Insurance Co., et al, No. 22-10614, United States Court of Appeals, Eleventh Circuit (February 8, 2024) established that death of two liposuction patients were unable to collect any of the judgments over $60 Million because the policy protecting the doctors had a $50,000 burning limits per person policy limit and a $100,000 burning limit aggregate. The insurer refused to pay after expending its full $100,000 in defense and expense costs.
The insurance case grew out of tort claims after Dr. Nedra Dodds performed a surgical liposuction procedure on April Jenkins at CJL Healthcare, LLC (the Clinic) in Georgia. Jenkins died that same day. Four months after her death, on June 20, 2013 at the same clinic, Dr. Dodds performed a surgical liposuction procedure on Erica Beaubrun, who died that night.
The current case arises from the Clinic's assignment to the Beaubrun estate of some of the Clinic's claims against its insurance companies after a consent judgment in the amount of $60,000,000 was entered in favor of the Beaubrun estate and against the Clinic in the estate's lawsuit.
The Eleventh Circuit found that the bottom line for this appeal is that under the terms of the policy, the defense of the Jenkins and the Beaubrun estates' lawsuits exhausted the Clinic's insurance coverage.
The Jenkins estate rejected an offer for the limits available. Prime notified the Clinic that the policy's Professional Liability Limit of $50,000 for a single claim had been depleted defending the Jenkins estate lawsuit. Dodds was dismissed as a party, and the Jenkins estate's case proceeded to trial, during which the Clinic was not represented by counsel. A default judgment was entered against the Clinic, and in December 2018 a jury awarded the Jenkins estate $60,000,000 in damages.
Similarly the Beaubrun estate rejected Prime's $50,000 offer and sued. Prime's letter to Dodds and the Clinic stated that the $50,000 "per claim limit of liability" had already been "completely depleted" in providing a defense in the Beaubrun "matter." It added that the $50,000 per claim limit had also been expended "in relation to the claims of the Jenkins estate against the defendants. Prime withdrew its defense in the Beaubrun "matter" since the aggregate limit had been exhausted.
The Claims in the Present Lawsuit
In their complaint, the Beaubrun estate and the Clinic asserted the following claims against the defendants: Count 1 breach of duty against Claims Direct; Count 2 breach of contract against Prime; Count 3 negligence against Prime and Claims Direct; (the complaint has no Count 4); and Count 5 unauthorized sale of surplus lines insurance against Prime and Evolution. Counts 6 and 7 sought punitive damages and attorney's fees against all the defendants.
DISCUSSION
The Limits of Liability section in the policy states that "[e]ach Wrongful Act Limit of Liability listed on the Declarations is the most we will pay for any combination of Damages and/or Claim Expenses because of all Damages arising or allegedly arising out of any one Wrongful Act." The policy also caps payouts on multiple claims against the insured and "[n]otwithstanding anything contained in this Policy to the contrary, the Insurer's financial obligation imposed by the coverage with respect to all Claims hereunder shall not exceed the amount specified on the Declarations as the aggregate Limit of Liability." That's a $100,000 cap on coverage for "all Claims."
According to the policy's plain terms, claim expenses come out of the policy's limits. The policy defines "Claim Expenses" to include "[a]ll fees, costs, and expenses charged by any lawyer or other service provider designated by the Insurer to represent the Insured" and "[a]ll other fees, costs, and expenses . . . resulting from the investigation, adjustment, defense, and appeal of a Claim." It sets the "Limit(s) of Liability" as the "maximum amount the Insurer will be obligated to pay for an otherwise covered Claim, including payment for Claim Expenses, Damages, or any other sums due under this Policy, the amount of which is set forth on the Declarations." And "[a]ll Claim Expenses reduce the available Policy Limits."
The district court was correct.
ZALMA OPINION
Burning limits policies were created to allow the insurer to know the exact amount it will need to pay in the event of catastrophic losses. Prime Insurance set a professional liability limit of $50,000 per occurrence and $100,000 in the aggregate - an obviously too small limit for the exposures faced by the doctor and the clinic. When the insurer exhausted the available limits it denied all further coverage and regardless of the judgments obtained in state court the Eleventh Circuit applied the contract terms and found that the insurer properly refused to pay more than the limit. Bad facts often make bad law but in this case the law was applied as the policy was written and made good law applying the contract as written.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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Zalma’s Insurance Fraud Letter – February 15, 2024
ZIFL Volume 28, Issue 4
The Source for the Insurance Fraud Professional
Subscribe here:
Zalma’s Insurance Fraud Letter (ZIFL) continues its 28th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/
The current issue can be read in full at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf and includes the following articles:
Do the Crime, Serve the Time
Chutzpah: After Pleading Guilty Fraudster Tried to Reduce his Sentence by an Appeal
After pleading guilty, Armando Valdes appealed his 60-month sentence for health care fraud, in violation of 18 U.S.C. § 1347. Valdes’s conviction and sentence arose out of his scheme to submit millions of dollars in fraudulent medical claims to United Healthcare and Blue Cross Blue Shield for intravenous infusions of Infliximab, an expensive immunosuppressive drug. These infusions, purportedly given to patients at Valdes’s medical clinic, Gasiel Medical Services (“Gasiel”), were either not provided or were medically unnecessary.
In United States Of America v. Armando Valdes, No. 22-12837, United States Court of Appeals, Eleventh Circuit (December 19, 2023) was not convinced of his many arguments against the sentence imposed by the District Court.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
More McClenny Moseley & Associates Issues
This is ZIFL’s twenty fourth installment of the saga of McClenny, Moseley & Associates and its problems with the federal courts in the State of Louisiana and what appears to be an effort to profit from what some Magistrate and District judges indicate may be criminal conduct to profit from insurance claims relating to hurricane damage to the public of the state of Louisiana.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
California Insurance Commissioner Lara Issues Consumer Fraud Alert As Flood Recovery Begins In San Diego County
Following the recent flooding in San Diego which damaged and destroyed hundreds of homes, businesses, and vehicles, Insurance Commissioner Ricardo Lara put the Department of Insurance on alert for potential fraud and illegal actions targeting flood victims. The Department has received reports from San Diego consumers of public adjusters approaching them immediately after the recent floods. The Department has posted “Don’t Get Scammed After a Disaster” tips in English and Spanish urging consumers not to rush into decisions and to report any suspected illegal actions by contractors or public adjusters.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
Health Insurance Fraud Convictions
Guilty in Arkansas
Shaona Mizell, 52, of Paragould, Arkansas. in Pulaski County Circuit Court on January 23, Mizell pleaded guilty to Medicaid Fraud, a class A misdemeanor.
Mizell was a personal care aide who billed Medicaid for several months of care that she did not provide. She was sentenced to one year of probation, a $200 fine and payment of $3,331.38 in restitution to the Arkansas Medicaid Program.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
Arson and Restitution
CONVICTED ARSONIST MUST PAY RESTITUTION
A fire at a residential property destroyed several structures and made nearly all of the owner’s personal property unsalvageable. M.W. pleaded guilty to first degree reckless burning for his role in starting the fire. The trial court ordered M.W. to pay over $1 million in restitution. In State Of Washington v. M.W., No. 85908-1-I, Court of Appeals of Washington, Division 1 (January 29, 2024) the court resolved the issue.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
New Book Now Available from Barry Zalma
Property Investigation Checklists: Uncovering Insurance Fraud, 14th Edition provides detailed guidance and practical information on the four primary areas of any investigation of suspicious claims. Available at the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/
Other Insurance Fraud Convictions
Kentucky Farmer Pleads Guilty to Multi-Million Dollar Crop Insurance Fraud Scheme
David Manion, a farmer from Simpson County, Kentucky, has confessed to orchestrating a fraudulent scheme that defrauded the federal government’s crop insurance program out of millions of dollars. This marks Manion’s second conviction related to crop insurance fraud within ten years, highlighting a recurring pattern of deceitful activities aimed at exploiting agricultural support programs.
Manion’s admission of guilt can after charges filed in November, accusing him of making false statements on crop insurance applications from 2016 to 2022. This fraudulent activity resulted in a staggering $3.5 million loss to the Federal Crop Insurance Corp., according to the plea agreement. The USDOJ is seeking a prison sentence and restitution totaling $3.5 million from Manion, alongside an additional $5,498,023 to settle other disputes.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
Insurance Fraud Attempt Defeated
THE HAWAIIAN, ATTEMPTED FRAUD DEFEATED BY A THOROUGH INVESTIGATION
The following is a fictionalized True Crime Story of Insurance Fraud from an Expert who explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
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
Over the last 55 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.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
Please tell your friends and colleagues about this blog and the videos and let them subscribe to the blog and the videos.
Subscribe to my substack at https://barryzalma.substack.com/publish/post/107007808
Go to Newsbreak.com https://www.newsbreak.com/@c/1653419?s=01
Go to X @bzalma; Go to the podcast Zalma On Insurance at https://podcasters.spotify.com/pod/show/barry-zalma/support; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – http://zalma.com/blog/insurance-claims-library.
Read the full article in Adobe pdf format at http://zalma.com/blog/wp-content/uploads/2024/02/ZIFL-02-15-2024.pdf
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Insurance Fraud Attempt Defeated
The Hawaiian
The following is a fictionalized True Crime Story of Insurance Fraud from an Expert who explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers.
Post 4734
The insured was a contractor in Honolulu. He made an excellent living cheating his customers. The insured’s most lucrative scheme was an electronic vermin killer. It consisted of a long wire and a transformer. The contractor strung the wire around a house and plugged it in a wall. The device, charged with low voltage from the transformer, allegedly repelled vermin. The insured guaranteed that all roaches, flying insects and rodents could not pass the charge in the wire.
When it didn’t work and a customer called to complain the insured would ignore the complaints.
Since the tropical Hawaiian climate is a prime breeding ground for insects, the insured had no lack of customers. He bought a Ferrari sports car with the profits.
Eventually the attorney general of the State of Hawaii learned of his fraud. Investigation showed that the vermin killer did not work. Eye witnesses reported cockroaches dancing on the wire unharmed.
The Attorney General filed administrative charges accusing the insured of consumer fraud. The local press published reports of the charges. His sales began to drop. He needed cash flow.
The insured went to the most exclusive jewelry store in all of Honolulu. The store occupied the 15th floor of a high-rise office building. To enter he needed to show identification to a guard and pass through two steel doors.
He bought a single wrist watch at the jeweler and charged it on his American Express card. He asked the jeweler for, and received, an appraisal of the wrist watch.
He then visited the local public library and withdrew three textbooks on gemology.
He returned to his office and made a Xerox copy of the appraisal. He then covered the description of the wrist watch with a large Post-It Note. He photocopied 20 new copies of the appraisal. The Post-It-Note was invisible to the Xerox machine and he had clean appraisals with no descriptions.
Using the books on gemology, he wrote out descriptions for forty-five separate items of ladies and men’s jewelry. He set values beside each item so they totaled over $500,000. He gave the blank appraisals to his secretary and had her type up the descriptions and values he had written onto the appraisal forms he had created. He then made two copies of the new appraisals and destroyed the originals.
Armed with his appraisals he visited a large retail insurance brokerage in Honolulu. He advised the broker that he had recently acquired the jewelry from his deceased mother and needed it insured. The broker was familiar with the jewelry establishment and its impeccable reputation. He accepted the Xerox copies of the appraisals, prepared an application, and submitted the application and appraisals to various markets. He received quotations from three different insurers. Each agreed to insure the jewelry. The insured selected the insurer that offered the lowest premium. He explained to his agent that he had a slight cash flow problem and the agent helped him by financing the premium.
He made one payment on the premium finance contract and then reported a theft.
He advised his insurer that the jewelry was secured in the locked drawer of his office which he considered to be a safe. His office was a small structure with a warehouse facility where he parked his construction truck and, on that night, the Ferrari. It was an employee’s birthday and he and five employees went to a local restaurant to celebrate the birthday. Since they could not fit in his Ferrari, they all went in his foreman’s eight passenger van.
When they returned from the birthday party, they immediately noticed that the Ferrari was no longer in the warehouse. The aluminum overhead door was off its track. Someone had broken in. The thieves must have found the keys to his Ferrari in the desk. The desk drawer was broken and on the floor. No jewelry remained in the building. The insured was distraught since the jewelry was his only connection with his deceased mother. He demanded that the police do everything they could to catch the thieves and return his jewelry. He told the police he did not want insurance money. He only wanted his family heirlooms back. He even asked his insurer to offer a reward for the return of the stolen jewelry.
The insurer, faced with a $500,000 loss assigned their most senior investigator to the claim. He agreed with the insured and offered a $50,000 reward for the return of the jewelry. He then began his investigation with the recorded statement of the insured.
Besides advising the investigator of the theft he informed him that his mother had mailed him the jewelry shortly before her death. She died four years before in a small village in the Philippines. She was afraid that the Philippine government would take the jewelry for taxes. To avoid those taxes mother had simply packaged them in a plain brown wrapper and sent them by mail. She did not insure the delivery nor did she register or declare to US Customs the contents. He kept them in his home, for safekeeping until her death when he believed they had become his property. Then he took them to the jewelry store to establish the value of the gift his mother had made to him. He was astonished that the jewelry had as great a value as reported by the jeweler. He immediately took steps to insure the jewelry.
Two days after the theft, the police found the Ferrari in a gully. Since it was only one of eight Ferraris on the entire island, there was little the thieves could do with it. The police believed the thieves set it afire. The police found only a burned out hull and no evidence available to lead them to the thieves. The destruction of the Ferrari seemed to establish the legitimacy of the claim.
The adjuster began the steps necessary to complete what might be a routine investigation. His first stop was at the jewelry store. He found the gemologist who signed the appraisal. He showed the appraisal to him and asked that he verify the appraisal. The jeweler stated:
“That is our appraisal form. That is a copy of my signature. I have no record of ever doing this appraisal. I have no recollection of ever doing this appraisal. I have no knowledge of the person with the name of the insured. That isn’t unusual however since I do one thousand appraisals a year.”
“Do you have your file copy?” the adjuster asked.
“That’s what is strange, I can’t find the file copy. But my secretary, just about the time of this appraisal began chemotherapy treatment for cancer. She’s dying and I can’t disturb her.”
The adjuster had a logical explanation for the failure to verify the appraisal. He could not, however, let it sit. As a simple straightforward theft claim was becoming complicated.
The adjuster next had a friend who works the South Pacific attempt to verify that the insured’s mother did in fact live in the village in the Philippines described by the insured. The investigator was successful. He found neighbors and relatives who knew the insured’s mother. He could not, however, verify that she had $500,000 in jewelry to donate to her son. In fact, he found that the insured’s mother lived in a one room house on stakes with a grass roof, no electricity, no running water and no indoor plumbing. Her ex-husband still lived in Honolulu.
The insured’s family name was unusual in Hawaii and it only took the investigator two days to find the insured’s father. The father lived in a basement apartment in a rundown area of Honolulu. He was pleased to give the adjuster an interview. He had been estranged from his son for twenty years and his wife for ten so he had no first hand, up-to date information. He did acknowledge that his wife owned jewelry. He told the adjuster:
“Yes, I believe it was very valuable jewelry she owned.”
“How much to do think it was worth?”
“At least $500-$600.”
The adjuster began his investigation in earnest. He invited the insured’s secretary out to lunch. Over a chef’s salad and a glass of ice tea he learned the secretary’s life story. He knew she had been in Hawaii for only two years having come to the islands from Iowa. She was young and very innocent. She liked her job but made only enough money to survive in the Islands. She could not believe the cost of housing compared to what it had been in Iowa.
After gaining her confidence the adjuster confronted the secretary with the result of his investigation. He told her he knew that the appraisals were not done by the jeweler. He showed her where he had discovered that the typewriter used to type the description of the items of jewelry was different from the typewriter used to type the name of the appraiser. He told her that he liked her and would be very sorry if she was involved in aiding her boss in committing a crime.
She began to cry. When he calmed her down, she confessed that she had typed in all of the descriptions and the values of the jewelry. Her boss, the insured, took the print ball out of the IBM Selectric typewriter and smashed it under his shoe. If asked, she was to say that his children broke the typewriter while playing with it. The adjuster thanked her, paid for lunch and suggested she get a new job. He told her he would do what he could to keep her out of criminal problems.
He then got permission from his client, the insurer, to deny the claim.
He wrote a simple brief, letter to the insured stating as follows: “Your claim is denied because it was presented by you with the knowledge that it was false and fraudulent.”
He said nothing more. The adjuster, as required by law, reported his findings to the local police agency and to the U.S. Postal Inspectors. Both promised to complete a prompt criminal investigation and prosecute the insured for insurance fraud. The adjuster waited, patiently, for five years. Every twelve months he would ask the police concerning their investigation. He would always receive the same response “We’re working on it.”
On the fifth year, just before the statute of limitations ran, they arrested the insured for insurance fraud, wire and mail fraud. On the testimony of the adjuster and the secretary the insured was convicted. The court sentenced him to five years in jail, suspended on the condition that he actually serve 30 days and that he make restitution of $10,000 in investigation costs to the insurer.
Five years elapsed since his conviction. He is still making a living as a contractor in Hawaii defrauding his customers. He paid when the probation officer caught him what he told the probation officer he could afford. In five years the insured paid, on the restitution order that is a condition of his probation, a total of $250.00. His probation is over.
The crime did not succeed. He did not collect $500,000. The insurance company did not succeed. It paid out over $10,000 to its investigators which it will never recover and the ordered restitution was never paid.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
Please tell your friends and colleagues about this blog and the videos and let them subscribe to the blog and the videos.
Subscribe to my substack at https://barryzalma.substack.com/publish/post/107007808
Go to Newsbreak.com https://www.newsbreak.com/@c/1653419?s=01
Go to X @bzalma; Go to the podcast Zalma On Insurance at https://podcasters.spotify.com/pod/show/barry-zalma/support; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – http://zalma.com/blog/insurance-claims-library.
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No Duty to Defend No Possible Duty to Indemnify
Legal Conclusions are Not Allegations of Fact
Post 4734
Zox LLC ("Zox") appealed the district court's grant of summary judgment in favor of West American Insurance Company. The district court held that West American had no duty to defend or indemnify Zox in an underlying trademark dispute between Zox and a group of entrepreneurs known as the "Zox Brothers" ("the Zox Litigation"). Zox contends the district court erred because the Zox Brothers sought damages for three potentially covered claims: (1) malicious prosecution; (2) disparagement; and (3) use of an "advertising idea."
In ZOX LLC, a California Limited Liability Company, v. West American Insurance Company; et al., No. 23-55125, United States Court of Appeals, Ninth Circuit (February 9, 2024) the Ninth Circuit resolved the dispute.
ANALYSIS
Under California law, a liability insurer owes a broad duty to defend its insured against claims that potentially seek damages within the coverage of the policy. Coverage turns not on the technical legal cause of action pleaded by the third party but on the facts alleged.
While the duty to defend is broad, an insurer will not be compelled to defend its insured when the potential for liability is tenuous and farfetched. To determine whether the duty to defend was triggered, the Ninth Circuit was compelled to compare the allegations in the Zox Brothers' pleadings ("the Pleadings") with the terms of West American's Insurance Policy ("the Policy").
Malicious Prosecution
To plead a malicious prosecution claim, the Zox Brothers must plead facts to prove that an underlying action was initiated or maintained (i) by, or at the direction of, [Zox] and pursued to a legal termination in favor of the Zox Brothers; (ii) without probable cause; and (iii) with malice. The Zox Brothers did not plead facts, nor provide extrinsic evidence, to satisfy any of the requisite elements of a malicious prosecution claim. The Pleadings did not trigger coverage for malicious prosecution.
Disparagement
To plead a disparagement claim, the Zox Brothers must plead facts to show a false or misleading statement that (1) specifically refers to the Zox Brothers' product or business and (2) clearly derogates that product or business. The Ninth Circuit was required to look past labels and at the facts alleged. Zox was unable to cite a single factual pleading in support of a disparagement claim.
Appropriation of Advertising Ideas
Zox contends that the Zox Brothers triggered coverage by claiming that Zox appropriated their "advertising ideas" by using the "Zox" name and "passing off" their products as Zox Brothers' goods. An "advertising idea" is a "process or invention" used to market one's goods. The district court did not err in finding that the Pleadings did not trigger coverage for a "use of another's advertisement" claim.
CONCLUSION
For the reasons stated by the Ninth Circuit, outlined above, it found that West American did not have a duty to defend or indemnify Zox in the Zox Litigation because, there was no duty to defend.
Where there is a duty to defend, there may be a duty to indemnify; but where there is no duty to defend, there cannot be a duty to indemnify.
ZALMA OPINION
The Ninth Circuit applied the clear and unambiguous language of the policy to the "facts" alleged; found that the allegations were mostly speculative or based on legal conclusions, failure to allege facts to support the three claims failed and, therefore, the Ninth Circuit had no choice but to affirm the summary judgment find no duty to defend nor a duty to indemnify.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
Please tell your friends and colleagues about this blog and the videos and let them subscribe to the blog and the videos.
Subscribe to my substack at https://barryzalma.substack.com/publish/post/107007808
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Go to X @bzalma; Go to the podcast Zalma On Insurance at https://podcasters.spotify.com/pod/show/barry-zalma/support; Go to Barry Zalma videos at Rumble.com at https://rumble.com/c/c-262921; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – http://zalma.com/blog/insurance-claims-library.
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Agent's Statement Binds Insurer
It is not Bad Faith Only to Deny a Claim
Post 4734
The California Court of Appeals dealt with a claim by Wynzell Lynn, Jr. in a breach of insurance contract case against defendants are AAA Life Insurance Company and its agent, Craigory Webb. Plaintiff appealed from a final judgment of dismissal that was entered after the trial court struck certain causes of action in plaintiff's operative complaint and sustained the defendants' demurrer as to other causes of action, without leave to amend.
In Wynzell Lynn, Jr. v. AAA Life Insurance Company et al., F085402, California Court of Appeals, Fifth District (February 9, 2024) explained in a lengthy opinion why the trial court erred.
FACTUAL BACKGROUND
Plaintiff purchased from defendant AAA Life Insurance Company (AAA) a life insurance policy for himself, along with a child term rider (rider) providing up to $10,000 in coverage per insured child. According to the First Amended Complaint (FAC) plaintiff understood from his prepurchase conversations with Webb that the rider would cover all of the children in plaintiff's household, even those without a biological or legally defined relationship (i.e., as an adopted child, foster child, or stepchild) to him. However, when one of the children in plaintiff's household-17-year-old Mahki Bowen-was murdered while the rider was in effect, AAA rejected plaintiff's claim for coverage because Bowen was not plaintiff's biological or legally recognized child (i.e., adopted child, foster child, or stepchild).
When plaintiff first contacted Webb within their household were four children under the age of 19: three with plaintiff's surname, plus Bowen, who was the biological child of plaintiff's fiancee and another man. Bowen's biological father had died in 2007, when Bowen was four years old, and Bowen had lived in plaintiff's household, as part of plaintiff's family, since he was about six years old. Although the FAC alleges that Bowen "was [plaintiff's child since he was approximately six years old," all agree that Bowen was not plaintiff's biological, step, adopted, or foster child.
Webb, as the agent for the insurer, stated, "'the rider covers all your children for $7.00."
The three-page rider contained the following relevant provisions. The rider "provides term life insurance coverage for each Insured Child." An Eligible Child must be dependent upon the Insured for support and living within the Insured's household or attending an educational institution as a full-time or part-time student.
In November 2020, about seven months after plaintiff's policy became effective, tragically, Bowen was fatally shot. On the date of his death, Bowen was 17 years old, unmarried, financially dependent on plaintiff, and living in plaintiff's household. Plaintiff contacted Webb to inform him of the death, and Webb "again represented to [plaintiff] that the Child Term Rider would provide coverage" and told plaintiff how he could initiate his claim. AAA formally denied plaintiff's claim under the rider, stating in its final rejection letter that Bowen was "not a 'qualifying child.' "
DISCUSSION
Breach of Contract (Express Contract Theory)
The trial court sustained the demurrer for failure to plead a breach of the rider by AAA.
Here, the definition of "Eligible Child" as it appears in the rider's first paragraph is, on its face, ambiguous, in that it is susceptible to more than one reasonable interpretation as to whom the term covers . The Court of Appeals noted that definition of this term as denoted in the first paragraph, can reasonably be read as the trial court read it, to limit coverage as of the policy's effective date, to children who meet all of the undisputed criteria and are the insured's biological, adopted, step, or foster children (that is, children who are encompassed in the categories specified in the second paragraph of the definition). The definition can also reasonably be read to provide coverage, as of the policy's effective date, for children who meet all of the undisputed criteria and are openly held out by the insured to be his children, consistent with California parentage law. As discussed below, "California parentage law creates a presumption that a person who openly holds out a child as his own is the child's natural parent." (emphasis added)
To the extent the rider can reasonably be interpreted to provide coverage for a child with a relationship to the insured akin to Bowen's relationship with plaintiff, the FAC properly pleads the element of breach-the only element the trial court found missing.
Defendants' contention that the phrase "all of the Insured's. children" an interpretation of the rider to the effect it covers children who were adopted by the insured or became his stepchildren or court-appointed foster children after it took effect, but not the insured's existing adopted children, stepchildren, and court-appointed foster children as of its effective date, would be unreasonable. The Court of Appeals concluded that "Eligible Child" in the first paragraph of the rider is ambiguous, in that it is reasonably susceptible to two interpretations.The FAC, liberally construed, indicates that plaintiff held Bowen out as his child; the FAC also alleges that Bowen lived in plaintiff's household and was dependent on plaintiff for support. Accordingly, in light of its ambiguity, the definition of "Eligible Child" in the first paragraph must be construed to protect that expectation.
In addition, in Shade Foods, Inc. v. Innovative Products Sales &Marketing, Inc. (2000) 78 Cal.App.4th 847 (Shade Foods) the Court of Appeals held that an insurance carrier is "bound by its agent's interpretation of coverage under the policy," and an agent's authority to bind the principal "unquestionably extends to giving ambiguous contract provisions an interpretation that the insurer itself might reasonably adopt." As a result, the court concluded, the insurer was "bound by its agent's interpretation of the contract."
Breach of the Covenant of Good Faith and Fair Dealing
The mere fact that an insurer withholds coverage based on an erroneous interpretation of the policy does not necessarily mean there was a breach of the covenant; to be liable in tort, the insurer must have acted unreasonably. Although the reasonableness of an insurer's denial of benefits" 'is ordinarily a question of fact,'" a court can conclude as a matter of law that an insurer's denial of a claim is not unreasonable, as long as there existed a genuine issue as to the insurer's liability.
The trial court's dismissal of the FAC's cause of action for breach of contract on an express contract theory, defendants argue in the alternative that plaintiff cannot plead this tort claim (i.e., breach of the covenant) because AAA's interpretation of the rider was reasonable and therefore shielded by the genuine dispute doctrine. The Court of Appeals agreed with AAA and it affirmed the trial court's dismissal of plaintiff's breach of covenant claim.
Negligence
An insurance agent has an obligation to use reasonable care, diligence, and judgment in procuring insurance requested by an insured. The law is well established in California that an agent's failure to deliver the agreed-upon coverage may constitute actionable negligence and the proximate cause of an injury. Accordingly, it concluded the FAC alleges adequate facts to show a special duty of care, breach of that duty, causation, and damages.
The judgment of dismissal was, therefore, reversed. The matter is remanded with instructions to the trial court to vacate the order sustaining the demurrer without leave to amend and to enter a new order (1) overruling the demurrer to the breach of contract (express contract theory) cause of action and (2) sustaining the demurrer to the breach of the covenant of good faith and fair dealing cause of action with leave for plaintiff to further amend his complaint to allege, if he is able, causes of action against AAA for breach of contract by estoppel, against AAA and Webb for violation of Business and Professions Code section 17200 et seq., against AAA and Webb for negligent misrepresentation, against AAA and Webb for negligence, and for reformation based on mutual mistake. The parties shall bear their own costs on appeal.
ZALMA OPINION
This case, over a $10,000 dispute, went through a claim denial, a demurrer dismissing the entire action, an appeal, a reversal of the breach of contract claim, and a return to the trial court to allow amendment of a statutory breach claim, if possible, and trial on the breach of contract case. No bad faith because it took the court to find a statute making a person "held out as a son" to be a son even if there is no physical, natural relationship nor a relationship by adoption. This is a case where the concept of "millions for defense and not a dime for tribute" requires reconsideration, mediation and settlement.
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https://youtu.be/su9qwq568dU
Convicted Arsonist Must Pay Restitution
Post 4731
A fire at a residential property destroyed several structures and made nearly all of the owner's personal property unsalvageable. M.W. pleaded guilty to first degree reckless burning for his role in starting the fire. The trial court ordered M.W. to pay over $1 million in restitution.
In State Of Washington v. M.W., No. 85908-1-I, Court of Appeals of Washington, Division 1 (January 29, 2024)
FACTUAL BACKGROUND
According to the affidavit of probable cause, on July 5, 2021, a fire occurred in Battle Ground, WA, involving a structure locally known as the "Old Cherry Grove Church," two dwellings, and a storage structure, all located on the same property. The property is owned by Steven Slocum. The damage resulted in a total loss of the structures and their contents.
Within two months after the fire, the investigating officer obtained recorded verbal and handwritten statements from five juveniles, including M.W., who came forward and admitted involvement in throwing a "mortar type firework" at Slocum's property.
The State charged M.W. with first degree arson. On January 5, 2022, the State charged M.W. by amended information with first degree reckless burning, to which M.W. pleaded guilty on the same day. M.W.'s statement on plea of guilty. M.W. agreed to pay restitution in full to all victims on charged counts, including dismissed counts and causes.
The trial court found that there was good cause to continue the hearing because there appeared to be a potentially complete loss of property and because of Slocum's emotional state. The court entered an order extending the restitution deadline to August 4, 2022 and a separate order setting a contested restitution hearing for August 3, 2022.
At the restitution hearing on September 28, 2022, the trial court took testimony from Slocum and admitted exhibits into the record. Slocum testified his property included a former church and his home, a parsonage house, and three separate buildings for classrooms, and carports. Slocum purchased the property because it had ample storage space, he was "kind of a hoarder," he had "a lot of stuff," and "this was an ideal place to have it." Slocum decorated the church with "a lot of antiques" and completed "repairs and upgrades." His collection included "[a] lot of phonographs, old victrolas and Edison cylinder players and musical- musical things." Slocum also bought a "couple of pianos, player pianos and a lot of slot machines." Slocum kept several items of family sentimental value in his home, such as furniture pieces, photographs, his mother's jewelry box and purse, his father's TV shop's test equipment, and an Aga cookstove.
Slocum and his nephew were in the back of the church on July 5, 2021, when the fire started. Slocum called 911 and was unable to extinguish the fire using a fire extinguisher. While on the phone with emergency dispatchers, he started taking pictures. The court admitted several photographs into evidence, including ones Slocum took during the fire and after the fire documenting the damage. State Farm prepared an estimate to rebuild the structures for $999,354.74. State Farm paid $569,255.85 for the damage to the buildings and Geico paid $7,000.00 for the truck. The remaining vehicles were not covered by insurance.
Courts in other contexts have construed "good cause" to require a showing of some external impediment that did not result from a self-created hardship that would prevent a party from complying with statutory requirements.
The fact that he could not salvage anything from his destroyed home also speaks to the difficulty in cataloging and estimating his personal property losses within 180 days after the disposition hearing. The trial court did not abuse its discretion in finding there was good cause to extend time for the restitution hearing.
M.W. argued there was insufficient evidence of the value of the items ordered as restitution. Restitution must be limited to easily ascertainable damages for, relevant here, injury to or loss of property. Where the offender has contractually undertaken to pay restitution pursuant to a plea agreement, the offender is bound by the terms of the agreement.
When disputed, the facts supporting a restitution award must be proved by a preponderance of the evidence. Evidence supporting restitution is sufficient if it affords a reasonable basis for estimating loss and does not subject the trier of fact to mere speculation or conjecture.
M.W. argues for the first time in his reply brief that State Farm's estimate does not make sense but at another point, it estimated loss as $999,354.74 and indicated it issued him a check for $569,255.85. The Court of Appeals noted that this argument appears to misread the State Farm documents, which separate the repair costs for the church structure and the dwelling structure, and plainly indicate a replacement cost of $999,354.74 for the two.
Given the extensive nature of the personal property loss, the amount for which Slocum had insured it provided a reasonable basis for estimating that he had suffered loss in at least that amount.
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Ambiguous Exclusion Unenforceable
Unrepaid, Unrecoverable, or Outstanding Credit Exclusion Unenforceable
Huntington National Bank ("Huntington") sued AIG Specialty Insurance Company and National Union Fire Insurance Company of Pittsburgh, Pennsylvania (together, "AIG") alleging breach of contract and bad faith stemming from AIG's denial of insurance coverage for Huntington's settlement of a bankruptcy fraudulent transfer proceeding brought by the trustee of a bankrupt company. In granting summary judgment for AIG, the district court held that:
Huntington's claim for insurance coverage was uninsurable under Ohio law,
Huntington's claim was independently excluded under the insurance contract's exclusion for "unrepaid, unrecoverable, or outstanding credit" and
the larger settlement rule did not apply to Huntington's settlement.
In Huntington National Bank v. AIG Specialty Insurance Co., et al., No. 23-3039, United States Court of Appeals, Sixth Circuit (February 1, 2024) the Sixth Circuit resolved the dispute.
FACTS
AIG issued to Huntington a bankers professional liability insurance (BPL) policy for that provided coverage up to $15 million, after a $10 million retention. Any liability exceeding the primary policy was covered by an excess policy issued by National Union for the same coverage period, which provided $10 million in excess coverage. The parties do not dispute that these policies apply to Huntington's claim.
The policy covers any actual or alleged Wrongful Act of any Insured in the rendering or failure to render Professional Services.Relevant to the dispute are exclusions specific to Huntington's performance of "Lending Acts." The relevant exclusion clarifies that "[t]he Insurer shall not be liable to make any payment for Loss in connection with any Claim or Claims made against any Insured: for the principal and/or interest of any unrepaid, unrecoverable, or outstanding credit."
The policy was implicated when Huntington unwittingly became the bank for a fraudulent company, Cyberco Holdings, Inc. Cyberco represented that it purchased computer equipment from a vendor, Teleservices. In reality, Teleservices was a paper company that Watson created to perpetuate his fraud.
Huntington's security department discovered that the FBI was investigating Cyberco, that Watson had been permanently blacklisted by the National Association of Securities Dealers, and that he had confessed to and served time for fraud-related crimes. But the Huntington security department did not share any of this with the team responsible for Cyberco. From May 2004 to October 2004, Cyberco gradually repaid its entire loan, a relief for the Huntington team. Later in 2004, the FBI raided Cyberco's offices, and Watson committed suicide shortly thereafter.
Following the FBI raid, creditors of Cyberco and Teleservices, both entirely fraudulent companies, discovered that the companies were bankrupt. The trustees of Cyberco and Teleservices filed adversary proceedings against Huntington, claiming that Huntington put its desire to be repaid ahead of its concerns that Watson was committing fraud and, by doing so, perpetuated the Ponzi scheme to its benefit and other lenders' detriment.
The bankruptcy proceedings were long and complex, including two trials and multiple opinions. Huntington argued it was not liable for any repayments before April 30, 2004, and that its liability was thus limited to the $12,821,897.07 in loan repayments for which the Sixth Circuit had already found Huntington liable. On the other hand, the trustee argued that Huntington had knowledge of the voidability of the transfers it received after November 16, 2003, making $35,968,475, plus interest, the proper recoverable amount. In March 2018, Huntington settled with the trustee for $32,000,000.
THE INSURANCE CLAIM
Throughout the bankruptcy litigation, Huntington sent AIG several requests for coverage. AIG disclaimed coverage, acknowledging that there was "potential coverage" under the policy because the Wrongful Acts alleged arose from Huntington's performance of banking services to Cyberco, but citing exclusions. AIG refused Huntington's claims.
Huntington subsequently sued AIG. AIG also moved for summary judgment, asserting that Huntington's settlement payment was not a "Loss" under the policy and, even if it was, Endorsements 5, 7, and 10 precluded coverage.
The district court granted AIG's motion for summary judgment on the grounds that Huntington's claim was uninsurable under Ohio law. The district court also granted summary judgment for AIG on the grounds that Huntington's claim was independently excluded by Endorsement 7, which bars recovery for "unrepaid, unrecoverable, or outstanding credit."
ANALYSIS
Under Ohio law, an insurance policy is a contract between the insurer and the insured. It is "well-settled" in Ohio law that, where provisions of a contract of insurance are reasonably susceptible of more than one interpretation, they will be construed strictly against the insurer and liberally in favor of the insured.
Exclusions of coverage must be clear and unambiguous to be enforceable. Where exceptions, qualifications, or exemptions have been added to an insurance contract, there is a general presumption that anything not clearly excluded by such provisions is included in the insured's coverage.
Under the insurance policy, the definition of "Loss" excludes "civil or criminal fines or penalties imposed by law, punitive or exemplary damages . . . or matters that may be deemed uninsurable under the law pursuant to which this policy shall be construed."
Huntington's claim was for $15,000,000 of a $32,000,000 settlement of a bankruptcy fraudulent transfer proceeding. Huntington correctly asserted that there was no showing of intentional malice by the transferee that is required under the fraudulent transfer provisions of the bankruptcy code, meaning that an order to return funds is not a punishment in any sense. Liability under the fraudulent conveyance statutes is not tantamount to the type of culpable conduct that Ohio courts have held precludes insurance recovery. Fraudulent transfer laws are remedial not punitive
The Sixth Circuit concluded that Huntington had no ill will or malice when it made the loan or sought its repayment, obviating any deterrent effect of denying coverage.
AIG's arguments to the contrary were unavailing. On appeal, AIG cites several authorities in support of its argument that there is a "well-established principle in insurance law that when an insured returns property that it was never legally entitled to acquire, the insured has not sustained a 'loss' within the meaning of an insurance policy."
AIG and the district court made a form-over-substance argument for exclusion. AIG's interpretation is not unreasonable. However, that its position is one of multiple reasonable interpretations of the text and because the application of the contra proferentem rule in this context conclusively resolves the interpretation of "unrepaid, unrecoverable, or outstanding credit.
The Sixth Circuit reversed the district court's grant of summary judgment for AIG on the insurability of Huntington's claim under Ohio law and the exclusion of Huntington's claim under Endorsement 7.
ZALMA OPINION
Bankruptcy litigation, banking, and fraud upon a bank by a Ponzi schemer who, when caught by the FBI committed suicide, was sued by creditors of the Ponzi scheme because the bank had its loan repaid and they did not. After lengthy litigation the bank settled the bankruptcy suits only to have its insurer refuse to pay based upon an exclusion that was not sufficiently clear to be enforced. AIG will need to pay its limits to its insured and the excess - that followed form with AIG - will probably find it must pay its limits as well. The Sixth Circuit read the full policy and interpreted it in line with Ohio law as should AIG before it rejected coverage.
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Do the Crime, Serve the Time
Chutzpah: After Pleading Guilty Fraudster Tried to Reduce his Sentence by an Appeal
Post 4730
After pleading guilty, Armando Valdes appealed his 60-month sentence for health care fraud, in violation of 18 U.S.C. § 1347. Valdes's conviction and sentence arose out of his scheme to submit millions of dollars in fraudulent medical claims to United Healthcare and Blue Cross Blue Shield for intravenous infusions of Infliximab, an expensive immunosuppressive drug. These infusions, purportedly given to patients at Valdes's medical clinic, Gasiel Medical Services ("Gasiel"), were either not provided or were medically unnecessary.
In United States Of America v. Armando Valdes, No. 22-12837, United States Court of Appeals, Eleventh Circuit (December 19, 2023) was not convinced of his many arguments against the sentence imposed by the District Court.
LOSS AMOUNT
Under sentencing guidelines, U.S.S.G. § 2B1.1(b)(1), a defendant's offense level increases with the amount of "loss" caused by the offense. In Valdes's case, his base offense level was increased by 22 levels because the district court found that the loss amount was $38 million.
Section 2B1.1(b)(1)(L) provides that a defendant's base offense level is increased by 22 levels if the loss from the fraud offense was more than $25 million but less than $65 million. Guidelines do not require a precise determination of loss. Instead, the district court need make only a reasonable estimate based on the available information.
While the government has the burden to prove the loss amount with specific, reliable evidence, the district court may make its factual findings as to the loss amount based on, among other things, evidence presented at trial or sentencing or on the undisputed statements in the presentence investigation report ("PSI").
ANALYSIS
Valdes was unable to show the district court's determination that the loss amount of $38 million was clear error. In his factual proffer and at his plea hearing, Valdes admitted that through his medical clinic, Gasiel, he submitted approximately $33 million in fraudulent claims to United Healthcare and approximately $5 million in fraudulent claims to Blue Cross Blue Shield. Because there is a strong presumption that those statements are true the district court could rely on them in determining the loss amount.
Valdes's arguments failed because: First, for purposes of the loss amount under the intended loss includes unlikely amounts of pecuniary harm, such as claims that exceed the insured value; Second, at the sentencing hearing, Valdes's own fraud analyst testified that, even accounting for duplicate claims, the total loss amount was above $25 million.
The Eleventh Circuit concluded that Valdes did not show clear error in the district court's determination.
SOPHISTICATED MEANS ENHANCEMENT
Valdes also challenged the district court's application of a sophisticated means enhancement. Valdes argues that his offense involved the largely repetitive act of billing for a service that was not provided and was easily detectable.
If a defendant's fraud offense involved sophisticated means, his offense level is increased by two levels. Whether conduct is sophisticated is based on the conduct as a whole, not on the individual steps. Repetitive and coordinated conduct can be a sophisticated scheme even when no one step is particularly complicated. Addressing a sophisticated means enhancement, the Eleventh Circuit reviews a district court's factual findings for clear error.
The Eleventh Circuit found no error in the district court's application of the two-level sophisticated means enhancement. Based on his factual proffer and undisputed facts in the PSI, Valdes operated an elaborate, years-long scheme to defraud insurance companies for expensive Infliximab infusions, obtaining over $7 million as a result. The large amount of money defrauded and the six-year period the scheme went undetected support a finding of sophisticated means. The fact that Gasiel was a real medical clinic that provided other, legitimate medical services to real patients, including primary care services and other intravenous infusions, made the fraud scheme involving Infliximab infusions more difficult to detect and was, thus, sophisticated.
ABUSE-OF-TRUST ENHANCEMENT
If a defendant abused a position of public or private trust, or used a special skill, in a manner that significantly facilitated the commission or concealment of the fraud offense, the sentencing court increases his offense level by two levels. Being a doctor is a type of special skill.
The undisputed facts show Valdes used his skills as a trained doctor, whether licensed or not, to facilitate his fraud by submitting false medical claims. Given that Valdes used a special skill in the commission of his offense, the district court properly applied § 3B1.3's two-level enhancement.
FORFEITURE OF VALDES' RESIDENCE
Valdes argues the district court erred by ordering the forfeiture of his home as substitute property. Valdes admits that as part of his plea agreement, he agreed to forfeit his primary residence as substitute property.
The record showed that the forfeiture allegations in Valdes's indictment and the plea agreement he signed both expressly identified Valdes's primary residence by address as being substitute property potentially subject to forfeiture. The district court explained, among other things, that Valdes "not only agree[d] to give up property that was directly derived from this crime," but also "to give up what is known as substitute assets." Valdes responded that he understood the forfeiture provision.
The record as a whole reflects that Valdes understood that his primary residence was the substitute property that could be subject to forfeiture. Because Valdes showed no plain error in the district court's accepting his guilty plea as to the forfeiture allegations, he failed to show the district court erred in ordering the forfeiture of his primary residence as substitute property.
ZALMA OPINION
Insurance fraud perpetrators have unmitigated gall and refuse to admit that they were actually caught committing the crime of insurance fraud and must serve the time and pay the restitution or fines required. Valdes tried, after entering into a plea agreement to avoid trial and a more lengthy sentence, included the forfeiture of his home, only to file a spurious appeal to save it. The Eleventh Circuit saw through his scheme and made him serve the time in prison for 60 months and pay for the crime with the assets he gained as a result of his years of fraud.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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Serious Injury Does Not Change Policy Wording
UIM Policy Reduced Limit Reduced by Amount Paid by Other Insurers
Post 4729
In an interpleader action involving the insurance coverage for survivors of a tragic auto accident. De Smet Insurance Company of South Dakota (De Smet) proposed distribution of the available insurance funds that had been paid into the Court.
In Hallmark Insurance Company, De Smet Insurance Company; and National Casualty Company v. Gail Hoefert and Aaron Hoefert, as personal representatives of The Estate Of Andrew Joseph Hoefert; Gail Hoefert and Kerry Hoefert, as Legal Guardians of B.E.H. minor and C.T.H. minor; et al, No. 4:22-cv-4069, United States District Court, D. South Dakota, Southern Division (January 29, 2024) the court resolved the dispute.
BACKGROUND
The Hoefert Family-Jennifer, Andrew, Jennifer's daughter, and the two young children of Jennifer and Andrew- were traveling on Interstate-90 in rural Montana. The driver of a Chevrolet Suburban crossed the center line, striking the Hoeferts' rental car, and killing himself and all occupants of the Hoefert car except the two young children. The latter were seriously injured and are currently under the guardianship of Gail Hoefert and Kerry Hoefert.
Plaintiff Hallmark insured the tortfeasor and filed this interpleader action to determine the liability of the insurance companies toward the survivors. Hallmark tendered $50,000, the amount of coverage in its policy. Two other insurance companies are involved. National Casualty insured the rental car occupied by the Hoefert Family, which carried coverage of $50,000 that has been tendered to the Court. De Smet was the insurance company of the Hoeferts, who had an underinsured motorist (UIM) policy of $500,000. De Smet has tendered $400,000 to the Court in satisfaction of the Hoefert Estates' claims.
Insurance Contract Provisions Governing Hoefert Estates Claims
The insurance policy De Smet provided to the Hoeferts lists “C. Underinsured Motorist Bodily Injury - $250,000 ea person, $500,000 ea accident.” The De Smet policy provided that “The limit of liability shown in the Declarations for each person for Underinsured Motorists Coverage is our maximum limit of liability for all damages, including damages for care, loss of services, or death, arising out of 'bodily injury' sustained by any one person in any one accident. Subject to this limit for each person, the limit of liability shown in the Declarations for each accident for Underinsured Motorists Coverage is our maximum limit of liability for all damages for 'bodily injury' resulting from any one accident. “
ANALYSIS
In addition to their serious physical injuries, the surviving children of the Hoeferts have experienced the tragic loss of their parents and older sister. Apart from the emotional impact, the economic loss has been and will continue to be significant. The court realized that payment of the insurance proceeds at issue in this case will only compensate a part of the total losses.
The disagreement presented was how to calculate the proper payment of the insurance coverage. The Hoeferts' insurance policy with De Smet provided for $500,000 in underinsured motorist coverage. The policy also provides in Section D OTHER INSURANCE that the maximum amount that will be paid is the “highest limits of underinsured motor vehicle coverage that the ‘insured' specifically requested under any one policy.”
This means that if a person with a De Smet policy of this type purchased, for example, an umbrella policy from another insurer which included underinsured motorist coverage of $500,000 and thought this was increasing the UIM coverage to one million dollars under both policies, the person would in fact receive no additional UIM coverage because of the language of the De Smet policy.
Because the Estates were compensated $100,000, De Smet claimed, based on the policy wording, that it owes only the amount of what is said to be “uncompensated damages” remaining, amounting to $400,000. The damages for which no compensation will be received clearly exceeds $500,000.
CONCLUSION
De Smet has moved for summary judgment, arguing the issue presented is legal, not factual. De Smet deposited with the court $400,000 that it believed was all it owed. The total amount Hoefert Estates would receive is $500,000. Hoefert Estates argued the calculated its rights differently. The total for the Estates under that argument would be $550,000 taking into account the fact that there are two UIM coverages involved in the case.
South Dakota's statute authorizing payment of underinsured motorist damages that are uncompensated and the provisions of the insureds' De Smet policy. Because Hallmark and National together compensated the Estates in the amount of $100,000, De Smet is responsible for only $400,000 under the statute and its policy with the Hoeferts.
ZALMA OPINION
There was no question that the various insurers owed money to the estates. They deposited into court the amounts they believed was owed under the terms of the policy and the statutes of the state of South Dakota. The court read all the policies applied their terms and South Dakota statutory law and concluded that the policies must be enforced as they were written and the estates were only entitled to the highest limit of Underinsured Motorist Coverage available, $500,000.00.
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Appraisal Pointless if Coverage Not Provided
If Policy Says Building Coverage is "Not Provided" There Can be no Claim
Post 4728
Plaintiff Kota Me Patates LLC (“KMP”) filed a motion to compel appraisal to abate this insurance coverage dispute. Defendant Nationwide Mutual Fire Insurance Company responded with a separate motion for summary judgment asserting that the policy does not cover KMP's claimed losses.
In Kota Me Patates LLC v. Nationwide Mutual Fire Insurance Company, No. 4:23-cv-01573, United States District Court, S.D. Texas, Houston Division (December 21, 2023) the USDC's magistrate judge recommended a resolution of the disputes.
BACKGROUND
KMP had a business insurance policy with Nationwide (the “Policy”), effective from January 1, 2020 to January 1, 2021. The Policy states that it “includes Buildings ..., Business Personal Property ..., or both, depending on whether a Limit of Insurance is shown in the Declarations for that type of property.” (emphasis added). The referenced Declarations page explicitly states that coverage for KMP's building is “NOT PROVIDED[.]”
On January 24, 2022, a year after expiration of the policy a representative from the office of KMP's attorney contacted Nationwide to report a claim for structural damage to KMP's property. The damage allegedly resulted from a plant explosion two years earlier, on January 24, 2020.
KMP sued Nationwide in Texas state court. Nationwide removed the suit to the USDC. In the meantime, Nationwide contacted KMP's counsel to obtain more information about KMP's claim. Eventually, KMP's attorney sent a formal notice of claim, stating that KMP intended to invoke the Policy's appraisal provision. Nationwide requested more information, including an opportunity to inspect the asserted damage and a sworn proof of loss. KMP failed to provide the information that Nationwide requested. Nationwide therefore denied coverage for the loss, noting that KMP failed to provide a description of how, when and where the loss or damage occurred, did not provide prompt notice of the loss or damage, and failed to submit a signed, sworn proof of loss as requested.
Despite filing the suit months earlier, KMP's attorney finally sent Nationwide a demand letter on October 2, 2022. The letter included an estimate of $92,508.92 to repair KMP's structure. KMP then filed a motion to compel appraisal and abate the suit. Nationwide instead filed a motion for summary judgment.
ANALYSIS
Nationwide sought summary judgment on KMP's breach of contract claim on multiple grounds, including that the Policy does not cover KMP's claim for damages to its building. Given the clear Policy language, the Court had no need to address Nationwide's alternative contentions.
The Policy provides zero coverage for any damage to the building. Because Nationwide did not breach the Policy by denying coverage, it is entitled to summary judgment on KMP's breach-of-contract claim.
Nationwide also argued that KMP cannot recover on its extracontractual claims for breach of the common law duty of good faith and fair dealing, violations of the Deceptive Trade Practices Act (“DTPA”) and Chapters 541 and 542 of the Texas Insurance Code, common law fraud, and civil conspiracy. The USDC noted that the lack of coverage, coupled with the lack of any injury independent of Policy benefits, forecloses any extracontractual basis for relief.
Mere allegations do not constitute competent summary judgment evidence. Bare allegations that an insurer “misrepresented the scope of” coverage are not sufficient to show that the misrepresentation induced the purchase.
KMP's Request For Appraisal Was Denied.
The disposition of KMP's breach of contract claim defeats its request to compel appraisal. The purpose of appraisal is to resolve disputes concerning a property's value or the amount of a covered loss. Appraisal is pointless when, as here, the Policy explicitly states that the loss is not covered.
ZALMA OPINION
The KMP claim was incompetent on many bases, not the least of which was a claim for damage to a building that the policy explicitly said in bold print that building coverage was "NOT PROVIDED." Add to that a two year late report, no compliance with policy conditions, and a spurious argument for tort damages and the Magistrate apparently had no choice but to recommend granting Nationwide's motion and sending KMP and its counsel home with a total loss. Counsel for KMP apparently failed to read the Declarations page of the policy. A total waste of time for the litigants and the court.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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A Incomplete Aircraft is Still an Aircraft
Injured by an Aircraft Fuselage Arose Out of Ownership of Aircraft
Post 4727
A woman was severely injured while moving an inoperable airplane. She now seeks to recover from her husband's homeowner's insurance policy. The insurance policy excludes injuries "arising out of" the ownership, maintenance, use, loading or unloading of an aircraft. The policy further defines "aircraft" as "any conveyance used or designed for flight."
In Lisa Thompson v. United Services Automobile Association and Matthew Mrzena, No. S-18462, Supreme Court of Alaska (January 26, 2024) the Supreme Court resolved the dispute over interpretation of the policy wording.
FACTS
Claiming that the policy should cover her injury because in her view the aircraft became mere "parts" after her husband removed the wings, elevators, and tail rudder. The superior court disagreed, concluding that the fuselage was still an "airplane" and that, in any event, her injuries arose from her husband's ownership of the aircraft. The court determined that her injuries were therefore not covered by the policy.
Around 2011 Matthew Mrzena purchased a 1946 Piper PA-12 airplane (Piper). Mrzena stopped using the Piper in 2014 when it failed an annual inspection and was deemed no longer airworthy. Mrzena removed the wings, tail rudder, and elevators from the fuselage, leaving the remainder of the fuselage and many other parts intact, including the wheeled landing gear, propeller, seats, windows, and engine. Mrzena kept the Piper in a plastic temporary garage at his home in Palmer, Alaska.
In 2019, Mrzena purchased a new residence where he planned to live with his now-wife Lisa Thompson. During the summer Thompson and Mrzena were in the process of moving their belongings, including the Piper, to the new home. As part of the move the Piper needed to be pushed out of the garage and onto a trailer. Mrzena was pushing from the back of the Piper, with Thompson at the front, when Thompson became pinned under the Piper's nose. Thompson's resulting injuries were severe.
At the time of the injury Mrzena had the Piper registered as an aircraft with the Federal Aviation Administration (FAA). He also held an aircraft owner-specific liability policy on the Piper with Avemco Insurance Company (Avemco). Throughout his ownership of the Piper, Mrzena continued to renew both the Piper's FAA registration and the Avemco aircraft policy.
DISCUSSION
Interpreting USAA's aircraft exclusion pursuant to the reasonable expectations of the lay insured, the Supreme Court concluded that the policy's exclusion of coverage for injuries arising out of the ownership or maintenance of an aircraft applies to exclude coverage for Thompson's injuries. Regardless of whether the Piper was an airplane or a collection of airplane "parts" when it injured Thompson, the injury arose out of Mrzena's ownership.
The Policy Excludes Coverage For Thompson's Bodily Injuries Because They Arose Out Of Mrzena's Ownership And Maintenance Of The Piper.
Generally, courts determine the liability of an insurer by the terms of the policy the insurer issued. Policy language is construed in accordance with ordinary and customary usage. A restriction on coverage is enforceable if an insurer, by plain language, limits the coverage of its policy.
The USAA policy broadly excludes coverage for bodily injury "arising out of" ownership and maintenance of an aircraft. This language supports the reasonable expectation that Thompson's injuries would not be covered because Mrzena and Thompson's movement of the fuselage, and her resulting injuries, "ar[ose] out of" Mrzena's ownership and maintenance of the Piper.
Reasonable plane owners would not expect that their planes cease to be aircraft solely because the aircraft had been partially disassembled to perform maintenance.
Mrzena testified that he removed the wings, tail rudder, and elevator to repair damage to the plane's exterior fabric, and to begin the process of re-covering the components. The Supreme Court noted that clear and unambiguous policy language excluding injuries arising out of ownership or maintenance of an aircraft forecloses Thompson's argument that her injuries were covered by the policy.
The Supreme Court concluded that a reasonable person interpreting the USAA policy language's broad exclusions for ownership, maintenance, and use would understand that the aircraft exclusion was intended to create "broad exclusions" for incidents involving a homeowner's airplane.
Thompson asserted that the Piper was not an "actual aircraft" and became mere "aircraft parts" at some point before her injury. The Supreme Court concluded that it need not determine whether the Piper was an aircraft or mere "parts" at the time of Thompson's injuries because it concluded that Thompson's injuries "arose out of" Mrzena's ownership of the Piper.
ZALMA OPINION
Common sense exists in the Alaska Supreme Court. An aircraft under repair is still an aircraft even if it cannot fly. The Plaintiff was injured while she an her husband were moving the aircraft to a new home where the intended repairs could continue. Therefore, the Plaintiff and her husband were involved in the ownership, maintenance use of an aircraft and the exclusion applies.
(c) 2024 Barry Zalma & ClaimSchool, Inc.
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