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Millions for Defense Not a Dime for Tribute

Presented By Barry Zalma, Esq. CFE

• By maintaining, training, educating and encouraging a professional claims staff. – Recognizing that it is the claims

staff that keeps the promise made by the insurer.

How is Insurance Profitable?

What is Insurance? • Insurance is a contract whereby one

undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.

– Insurance is not an entitlement or right. – Insurance is not a benefit provided by

the government. • Insurance is limited by the terms

and conditions of the contract.

What is Insurance? • Insurance has always been a contract of utmost good faith. • Therefore, the insurer is obligated to fulfill, in good

faith, the promises made by the insurance policy. • The insured also must treat the insurer in good faith. • The insurance contract is a mutual group of promises that both

agree to fulfill fairly and in good faith.

What is Insurance? • Just like the animals on George Orwell’s “Animal Farm” all parties to an insurance contract are equal.

• Some, however, are more equal than others.

• The insured can collect damages for the breach of the covenant while the insurer cannot.

What is Insurance? • Considering that the obligation of

good faith is imposed with greater effect on the insurer than on the insured – It is necessary for an insurer to

give at least as much consideration to the desires and funds of the insured as it gives to its own desires and funds.

What is Insurance? • Therefore, regardless of how beneficial to an insurer an offer of settlement appears, before accepting, the insurer must: – Determine whether the insured will be harmed in any way

by the acceptance of a settlement. • Determine whether the insurer will be harmed in any

way by the acceptance of a settlement. • Determine whether the insured will be harmed in any

way by the rejection of a settlement. • Determine whether the insurer will be harmed in any

way by the rejection of a settlement.

What is the first duty of the insurer? • To fulfill the promises made by the policy. – Third Party policies:

• To investigate claims and defend the insured to allegations whether false or fraudulent.

• To pay all legitimate claims for which the insured is liable.

What is the first duty of the insurer? • First Party policies. – To investigate thoroughly all

claims that might allow for indemnity for loss of property belonging to the insured.

– To determine if coverage exists for the loss.

– To pay all legitimate claims promptly and in good faith.

Specifics – third party liability

The common auto accident • An Insured negligently drives his vehicle into the rear-end of a car filled with three nuns and two priests. – All claim injury. – All go to the same chiropractor. – All are represented by the same

lawyer. – All make offers of reasonable

settlement.

The Duty to Defend • Every third party liability insurance policy contains a promise to defend the insured to any claim or suit for which coverage is provided. – Most policies have no limit on the amount

necessary to defend the insured. – Some, called “burning limits” policies allow the

cost of defense to reduce the limits available.

• Regardless, the duty is essential to the promise made by the insurer.

The Duty to Defend

• The duty to defend is broader than the duty to indemnify: – The basic language of the CGL

promises to defend an insured against any suit seeking damages because of bodily injury, property damage, or personal and advertising injury.

• An insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period.

The Duty to Defend • How is the defense provided?

– First, an adjuster is assigned to conduct a thorough investigation of the claim against the insured.

• The investigation covers all of the claims against the insured.

• The investigation collects evidence that can be used as part of the defense.

• The adjuster determines whether the insured is liable, in whole or in part, for the injuries claimed by the claimant.

• If the adjuster determines liability exists he will attempt to settle with the claimant before suit is file.

The Duty to Defend • What happens when the adjuster

can’t settle with the claimant? – The claimant will retain counsel to sue

the insured. • The adjuster will immediately, upon learning

of a suit, retain defense counsel. • The adjuster will provide counsel all evidence

he or she has collected as part of his investigation.

• The adjuster will ask counsel if additional investigation is required and will perform the additional investigation as soon as possible.

The Duty to Defend

• The subject of this talk is based upon a case where the insured owes nothing or the claim is suspected to be false or fraudulent. – Consider a claim that alleged that the insured rear-

ended the plaintiff on I-10 in Arizona on 6/19/2014. • On 6/19/2014 the insured was in India at the time

trying to catch a train. • The insured has a passport and airline tickets

proving he was not in the country at the time of the accident.

• The claimant refuses to believe he sued the wrong person and demands a jury trial.

The Duty to Defend

• What must the insurer do if the plaintiff offers to settle for $10,000, a sum less than the amount necessary to defend? – It cannot accept the offer.

• To do so would cause harm to the insured. • To do so, even if the settlement demand is less than the expected cost of

defense, would breach the promise to defend. • To do so would breach the implied covenant of good faith and fair dealing.

– It must thoroughly defend the insured through trial. • The financial interest of the insurer cannot overcome the obligation

to protect the insured. • The financial interest of the insurer cannot honor a false claim.

The Duty to Defend • There is no question the insurer would

save money if it accepted the offer. – The promise to defend is not limited by the

expense incurred. – To settle a false claim for an offer based on saving

the expense of defense only would be a breach of the promise to defend.

• The insured will not receive what was promised by the policy.

• The covenant of good faith and fair dealing would be violated.

The Duty to Defend

• What must the insurer do when the insured wants to go to trial? – Ignore the right of its insured and enter into settlement to save money. – Ignore its pecuniary interest and defend the insured through trial.

• The answer requires a review of the promises made. – It says it will defend the insured, even if the claim is false and fraudulent. – It does not say it will defend the insured as long as it is not too expensive. – It must negotiate an agreement with the insured to settle for the amount of the

offer or go to trial and the insured agrees to pay the difference if verdict is higher.

The Duty to Defend • What is the covenant of good faith and fair dealing?

– It is, by judicial fiat, a covenant - promise - incorporated in every policy of insurance issued in the United States.

– The covenant is a promise made by the insurer to the insured to treat the insured in good faith and not do anything to impair or injure the other’s right to receive the benefits of their agreement.

– The covenant is also a promise by the insured to treat the insurer in good faith and not do anything to impair or injure the other’s right to receive the benefits of their agreement.

The Duty to Defend

• What is the Tort of Bad Faith? – The courts of many states have created a tort of bad faith.

• The tort can exist if one of the parties to the contract of insurance does something that will injure the right of the other to receive the benefits of the agreement.

– Gruenberg v. Aetna Insurance Co., 9 Cal. 3d. 566, 108 Cal. Rptr. 480 (1973).

• Common-law third-party bad faith, which occurs when a liability insurer’s failure to settle a tort claim against its insured results in a judgment in excess of the insured’s policy limits.

– The insurer must avoid committing the tort in every claim.

The first party claim • The subject of this talk is based upon a case where

the insured owes nothing and the claim is false or fraudulent. – Consider a claim where the plaintiff alleges its property

was damaged in a 1994 earthquake and demands money from ABC Insurance Company.

• ABC provides the plaintiff with a copy of the policy that shows it first came into effect in September 1995.

• Plaintiff, refuses to dismiss and demands funds to settle. • The insurer and its counsel refuse to pay and insist on winning the suit by

summary judgment or trial.

The first party claim

• This was a real case, Scottsdale Ins. Co. v. Law Offices of Steven Zelig, Not Reported in Cal.Rptr.3d, 2006 WL 1148564 (Cal.App. 2 Dist.) – Scottsdale informed Public Adjuster Kapilow and

attorney Zelig that Regency's policy did not provide coverage until six months after the Northridge.

– Nevertheless, attorney Zelig served a complaint on Scottsdale.

• Scottsdale spent hundreds of hours of attorney time to win dismissal.

The first party claim

• Scottsdale protected its shareholders. – It refused to pay tribute to Zelig or his

clients. – It obtained a judgment and sanctions

against Zelig. – It did not stop there:

• Once it obtained a judgment showing no coverage Scottsdale sued Zelig.

• The court was not happy with Zelig. • The court issued severe sanctions against

him.

The first party claim • Zelig abused the legal system.

– It took Scottsdale three suits to collect its sanctions which kept growing.

– Zelig changed the name of his professional corporation to avoid collection.

– He appealed every ruling of the trial court. – He lost every appeal with additional sanctions added. – Scottsdale could have paid him off and saved money

but it did not. • It owed a duty to its insureds and shareholders

to not succumb to extortion. • It paid Millions for defense and refused to pay

tribute.

The first party claim • Claims are not always honest.

– Some insureds will attempt to defraud the insurer.

– When an insurer believes someone is attempting fraud it must

• Assign investigation to its SIU. • Obtain the assistance and counsel of an

experienced insurance fraud lawyer. • Report the suspicion to the property authorities.

The first party claim • A fraudulent first party

claim – Arson for Profit

• Evidence shows multiple points of origin.

• Evidence shows use of accelerants.

• Evidence shows use of “trailers” to spread the fire.

The first party claim

• A fraudulent first party claim – Arson for Profit – What Must

the Insurer Do? • Gather a team:

– Fire cause and origin investigator. – SIU investigator. – Forensic accountant. – Construction consultant. – Certified Fraud Examiner. – Experienced Insurance Fraud and

Arson lawyer.

The first party claim

• A fraudulent first party claim – Arson for Profit – What Must the Insurer Do?

• Compel the insured to submit to an Examination Under Oath. • Compel the insured to submit documentation in support of the claim. • Review all evidence and advice of counsel with management. • If a preponderance of the evidence establishes the insured has attempted an

arson for profit fraud: – Deny the claim. – Disclaim coverage. – Consider filing a complaint for declaratory relief to establish the correctness of

the decision. – If advance payments were made consider suing insured for reimbursement.

Why Millions for Defense? • Because insurance is not an entitlement.

– Insurance is a contract whereby the insurer agrees to indemnify another against an unknown or contingent risk of loss.

• An attempted fraud, by definition, cannot be unknown or contingent.

• It is, rather, an intentional act that can never be insured.

Why “not a dime for tribute”?

• Because payment to get rid of an annoying and expensive law suit where nothing is owed: – Reveals that the insurer is a

pushover. – Insurance Fraud perpetrators

know each other and share successes.

– As soon as an insurer is found to be an easy target they will pile on.

Why “not a dime for tribute”?

• Refusal to pay a false or fraudulent claim: – Gains the insurer a reputation that it is

cannot be cowed. – There is no profit for a fraud perpetrator

to fight an insurer who is adamant to go to trial.

– The fraud perpetrators go to a different insurer who is easier to convince.

Why “not a dime for tribute”? • Case studies:

– Divorce Case – Levon Sogomonian – The Case of the Art Flambé` – The Tiffany Kid – The Magic Wall

Questions

The Zalma Insurance Claims Library Insurance Law is the most comprehensive, and yet practical, insurance law authority available today. This book is ideal for any professional who works in or frequently interacts with the insurance industry. Claims professionals, risk managers, producers, underwriters, attorneys (both plaintiff and defense), business owners, and students will benefit greatly from this all-inclusive reference. It is also the perfect resource for educators and trainers whose role requires an understanding of insurance law.

Insurance Claims: A Comprehensive Guide is the one resource that enables insurance professionals, producers, underwriters, attorneys, risk managers, and business owners to successfully handle insurance claims from start to finish—employing proven, practical techniques and best practices every step of the way.

Also: Mold Coverage Guide and the Construction Defect Coverage Guide.

For Details on all of the books in the Zalma Insurance Claims Library go to www.nationalunderwriter.com/reference-bookstore/property-and-casualty/zalma-insurance-claims-library.html