Tuesday, March 31, 2009

We Modernised Ourselves into this Ice Age

By New York State Insurance Superintendent Eric Dinallo
Published March 30, 2009 on the Financial Times (UK)

Many compare this financial crisis to the stock market crash of 1929, but it is closer to the credit freeze and bank panic of 1907. We might have avoided the worst of the current troubles if we had not overturned laws adopted in response to earlier crises. We should have placed more value on the hard-earned lessons of the instability that comes from unregulated markets and gambling on securities prices.

The bank panic of 1907 is remembered for J.P. Morgan forcing all the bankers to stay in a room until they agreed to contribute to fixing the crisis. What has been forgotten is one major cause of the crisis ­– unregulated speculation on the prices of securities by people who did not own them. These betting parlours, or fake exchanges, were called bucket shops because the bets were literally placed in buckets.

The states responded in 1908 by passing anti-bucket shop and gambling laws, outlawing the activity that helped to ruin that economy.
Credit default swaps are the rocket fuel that turned the subprime mortgage fire into a conflagration.
What has that got to do with today’s crisis? Credit default swaps are the rocket fuel that turned the subprime mortgage fire into a conflagration. They were the major cause of AIG’s – and by extension the banks’ – problems. AIG Financial Products, the unit that sold almost $500bn (€379bn, £353bn) of them, may therefore be viewed as the biggest bucket shop in history.

Credit default swaps started out as essentially an insurance policy. If you owned a bond in a company and were concerned it might default, you bought the swap to protect yourself. Literally, the buyer swaps the risk of default with someone else. Banks bought them to reduce the amount of capital they were required to hold against investments – in other words, to avoid regulation. Because they owned the swap, banks claimed they no longer had the risk of a default of the bond. Others bought swaps without owning the bond to place a bet on a company’s future.

But there was serious concern that swaps violated the old bucket shop laws. Thus, the Commodity Futures Modernisation Act of 2000 exempted credit default swaps from these laws. The act also exempted them from regulation by the Commodities and Futures Trading Commission and the Securities and Exchange Commission. Unregulated, the market grew enormously. Thus, one of the major causes of the financial crisis was not how lax our regulation, or how hard we enforced, but what we chose not to regulate.

Indeed, what we decided was old fashioned and in need of modernisation was, in fact, an effective check on an activity that for 100 years had been illegal, for good reason. As a result, we modernised ourselves into this ice age. 
We forgot that the biggest competitive advantage of the US financial system has always been safety, security and transparency.
The fear in 2000 was that if we regulated credit default swaps and required holding sufficient capital, the market would go where unregulated sellers could make more money. We forgot that the biggest competitive advantage of the US financial system has always been safety, security and transparency. If we destroy that perception, the long-term cost to our society is incalculable. What did we learn at the start of the last century that we then disregarded either through amnesia or hubris? What lessons, now learnt twice, can be gained from all this?

There are basically four ways people hand over money to financial institutions: 1. Bank deposit accounts. You deposit your money and the return of principal and interest is guaranteed. Banks are required to hold enough capital to deliver on that promise. 2. Insurance. If you suffer a loss, you are guaranteed recovery. Insurance companies are required to hold capital to meet that guarantee. 3. Gambling. If your bet wins, you are guaranteed your winnings. Casinos and racetracks are required to hold enough funds to ensure payouts. 4. Investment. There are no guarantees when you invest in a stock or a bond. You could lose everything. Appropriately, investment bank capital requirements are much lower. The first three categories contain guaranteed payments against future events; the fourth is merely aspirational. 
A key lesson of this crisis is the danger of insufficient capital and the risks of alchemy. 
 We thought we could use alchemy to create a perfect fifth category that allowed guarantees supported by little or no capital, and that would produce hefty profits with no real risk. Instead, we re-created the old bucket shop gambling parlours on steroids and another credit crisis. Financial products should be seen as belonging in one or another of those four categories and regulated appropriately. If there is a guaranteed outcome, then the guarantor must hold sufficient capital to make good on that guarantee. A key lesson of this crisis is the danger of insufficient capital and the risks of alchemy.

Credit default swaps must be regulated and sellers must be required to hold sufficient capital. That will make them more expensive, but it will mean the guarantee has real value.

Does requiring adequate capital mean the end of financial innovation? Of course not, it just means that most institutions will operate with less leverage. Risk and reward are integral to capitalism. But innovators should risk their own capital, not the entire financial fabric. Setting that balance is where effective regulation comes in. 
No one should ever again get to bet the store called the Entire American Economy. And certainly do not assume we are smarter than folks 100 years ago.
 In sum, if you offer a guarantee – no matter whether you call it a banking deposit, an insurance policy, or a bet – regulation should ensure you have the capital to deliver. If you offer investments, be transparent, but buyer beware. No one should ever again get to bet the store called the Entire American Economy. And certainly do not assume we are smarter than folks 100 years ago. As Mark Twain is supposed to have said, history may not always repeat itself, but it sure rhymes.

Evidence Insufficient to Establish a Founded Belief of a Staged Incident

Vista Surgical Supplies, Inc. a/a/o Jesus Rodriguez v. Utica Mut. Ins. Co.

(App. Term, 2nd Dept., decided 3/17/2009)

In AFFIRMING Kings Civil's award of summary judgment to plaintiff for $612.69, the Appellate Term concluded that the affidavit submitted by Utica Mutual's investigator, the testimony given by plaintiff's assignor and the driver during their examinations under oath, and the unsworn statement of the adverse driver submitted by Utica Mutual in opposition to plaintiff's summary judgment motion were insufficient to establish a founded belief that the alleged injuries did not arise out of a covered accident. 

The court also rejected Utica Mutual's argument that the assignor had failed to provide his personal income tax returns to substantiate his lost wages claim and thus failed to comply with a condition precedent to coverage: 
 We need not determine whether plaintiff's assignor failed to comply with a condition precedent since, in light of the "confidential and private nature" of an individual's income tax returns (see Walter Karl, Inc. v Wood, 161 AD2d 704 [1990]), which contain information far broader than that sought by defendant, defendant failed to make a sufficient showing of special circumstances to warrant their production (see Dore v Allstate Indem. Co., 264 AD2d 804 [1999]), especially given the fact that the information sought could have been obtained through other, more focused, means. 
Maybe someone from Utica Mutual can enlighten us on how the assignor's personal income tax returns were relevant to the assignee's claim.  And what were the "other, more focused, means" available to Utica Mutual to obtain the income tax information?  

Sunday, March 29, 2009

Storage of Business Property in Detached Structure Found Not to Constitute Excluded Business Use of Structure

R.B. Woodcraft, Inc. v. Acadia Ins. Co.

(4th Dept., decided 3/27/2009)

The owners of RB Woodcraft, Inc., insured their home with State Farm. Both a residence and a detached pole barn were located on plaintiffs' property. When a fire destroyed the pole barn, plaintiffs submitted a claim to State Farm for the loss of the barn and their personal property located in it. State Farm paid the claim with respect to the personal property but denied coverage for the pole barn itself, relying on a policy exclusion for "other structures . . . used in whole or in part for business purposes[.]" State Farm's policy defined "business" as "a trade, profession or occupation."

The insureds brought this action against State Farm and their agent. Both sides eventually moved for summary judgment, and Onondaga Supreme denied both motions. On its cross motion and appeal, State Farm contended that that the storage of business items inside the pole barn established that the pole barn was being used in part for business purposes.

Although plaintiffs had not cross-appealed, the Fourth Department MODIFIED the motion court's order to
grant plaintiffs' motion for summary judgment, finding that the exclusion State Farm relied upon to deny coverage was ambiguous:
Rather, we conclude with respect to the second cause of action that plaintiffs are entitled to summary judgment determining that State Farm is obligated to pay their claim with respect to the pole barn and to a money judgment for that claim. We therefore modify the order accordingly, and we remit the matter to Supreme Court to determine the amount owed by State Farm to plaintiffs for the loss of the pole barn and to direct the entry of judgment in favor of plaintiffs for that amount together with interest, costs, and disbursements. We reject defendants' contention that the storage of business items in the pole barn established as a matter of law that the pole barn was being used in part for business purposes. Rather, we conclude that State Farm "may not deny coverage based upon the use of the barn for the storage of business items. The phrase 'used in whole or in part for business purposes' is ambiguous in the absence of any qualifying language . . . and therefore must be construed in favor of the insureds" (Roland v Nationwide Mut. Fire Ins. Co., 286 AD2d 872, 872).
The policy's definition of "business" apparently wasn't sufficient "qualifying language" to prevent the Fourth Department from finding the business use exclusion to be ambiguous. In the Fourth Department, therefore, something more than merely storage use is required before a structure may be said to being used for a business purpose. The business use must also result directly in economic gain. See, Pepper v. Allstate Ins. Co., 20 AD3d 633 (3rd Dept. 2005).

Additional Insured Not Collaterally Estopped From Relitigating Factual Issue Affecting Coverage

Franklin Dev. Co., Inc. v. Atlantic Mut. Ins. Co.

(2nd Dept., decided 3/24/2009)

The "Additional Insured—Manager or Lessors of Premises" endorsement (CG 20 11 01 96) adds the lessor or manager as an insured "but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the named insured]."  Cases involving this endorsement often raise questions regarding the scope of the leasehold; in other words, what is "that part of the premises" that was actually leased to the named insured tenant?

Plaintiff Franklin Development Company leased space in a building it owned to Hertlein Special Tool Company. Pursuant to the lease terms, Hertlein obtained a CGL insurance policy for the leased premises from Atlantic Mutual, naming Franklin as an additional insured. An employee of Hertlein allegedly fell in a stairwell in the building and sustained injuries. He commenced a personal injury action against Franklin and two related entities, which in turned impleaded Hertlein.

In a previous appeal in the underlying personal injury action, the Second Department modified the motion court to grant plaintiffs' motion for summary judgment, dismissing the primary complaint and all cross claims against them.  Although plaintiffs had raised the issue of whether the stairwell where the injured party had fallen was an area covered by the additional insured clause of Hertlein's insurance policy with Atlantic Mutual, the Second Department stated that that issue "need not be reached" in light of its decision granting summary judgment to plaintiffs.

Plaintiffs moved and Atlantic Mutual cross-moved for summary in this declaratory judgment action.  The motion court not only granted Atlantic Mutual's cross motion, declaring that it was not obligated to defend or indemnify plaintiffs in relation to the underlying action, but also found, sua sponte, that this action was frivolous within the meaning of 22 NYCRR 130-1.1, and ordered that a hearing be conducted to determined an award of attorneys' fee to the defendant and the imposition of a sanction upon the plaintiffs.

In REVERSING the motion court's decision and remitting the matter back to Supreme Court for a determination on the merits of plaintiffs' motion, the Second Department ruled that the doctrine of collateral estoppel did not apply to preclude plaintiffs' from relitigating in this action the question of whether the stairwell was an area covered by the additional insured endorsement:  
Since Franklin appealed from the Supreme Court's denial of its motion for summary judgment on the third-party complaint, which was based on the issue presented here, Franklin addressed the issue before this Court, but, for the reasons discussed, this Court did not reach the issue. Thus, the issue was not necessarily decided and Franklin did not have "a full and fair chance to overturn the earlier decision" (Tydings v Greenfield, Stein & Senior, LLP, 11 NY3d 195, 200). Accordingly, the Supreme Court's determination thereof is not entitled to preclusive effect (see generally Tydings v Greenfield, Stein & Senior, LLP, 11 NY3d 195). 
On the issue of Atlantic Mutual's duty to defend, the Second Department also ruled that Atlantic Mutual "failed to establish, as a matter of law, that the allegations of the complaint in the underlying action did not suggest a reasonable possibility of coverage, that there was no possible factual or legal basis upon which the defendant might eventually be held to be obligated to indemnify Franklin, or that the only interpretation of the allegations against the insured was that the factual predicate for the claim fell wholly within a policy exclusion[.]"

Law Firm Not Entitled to Defense of Complaint Alleging "Wanton, Willful and Malicious" Conduct

Burkhart, Wexler & Hirschberg, LLP v. Liberty Ins. Underwriters, Inc.

(2nd Dept., decided 3/24/2009)

Sometimes plaintiffs deliberately plead into coverage; sometimes they do just the opposite, so the defendant does not enjoy liability coverage.

There's no indication whether the plaintiff in the underlying action did either, but its complaint against the insured law firm asserted claims for relief for "wanton, willful and malicious" breach of fiduciary duty for misappropriating the underlying plaintiff's confidential information and trade secrets; tortious interference with contract for using this information to attempt to convert the underlying plaintiff's members and prospective members to a newly- formed competing business entity; and for "wanton, willful and malicious" misappropriation of trade secrets.

Plaintiff law firm tendered the action to its professional liability insurer, Liberty Insurance Underwriters, which denied coverage, prompting this declaratory judgment action for defense and indemnification coverage.

In AFFIRMING the motion court's order granting summary judgment to Liberty, the Second Department ruled:
In determining whether an insurance carrier has a duty to defend under a professional liability policy, the point of departure is a comparison between the complaint against the insured and the language of the policy (see Cohen v Employers Reinsurance Corp., 117 AD2d 435, 438). If the underlying action falls within the scope of risk covered by the policy, the insurer is obligated to defend (see American Home Assur. Co. v Port of Auth. of N.Y. & N.J., 66 AD2d 269, 277). On the other hand, if the allegations, on their face, do not bring the case within the coverage of the policy, there is no duty to defend or indemnify (see Lionel Freedman, Inc. v Glens Falls Ins. Co., 27 NY2d 364, 368). 

Here, Liberty established its prima facie entitlement to judgment as a matter of law declaring that it was not obligated to defend and indemnify the Burkhart Firm in the underlying action, and the Burkhart Firm failed to raise a triable issue of fact in opposition. The basic coverage provision of the Liberty policy clearly limits coverage to claims which are caused by "any actual or alleged act, error, omission or personal injury which arises out of the rendering or failure to render professional legal services." Inasmuch as there is no allegation of negligence or malpractice arising out of the Burkhart Firm's performance, or failure to perform, legal services, the claim in the underlying action does not fall within the ambit of the policy (see Tartaglia v Home Ins. Co., 240 AD2d 396; Cohen v Employers Reinsurance Corp., 117 AD2d 435; George Muhlstock & Co. v American Home Assur. Co., 117 AD2d 117). For the same reason, the Supreme Court properly denied that branch of the Burkhart Firm's cross motion which was for summary judgment.

Whether Plaintiff's Assignor Was an "Eligible Injured Person" Is a Coverage Defense Not Subject to Preclusion -- Default Judgment Vacated

Westchester Med. Ctr. a/a/o Jamel Harris v. Allstate Ins. Co.

(Sup.Ct., Nassau Co., decided 3/25/2009)

Allstate moved to vacate a default judgment entered 15 days after its answer in this medical provider no-fault recovery suit was due.  Allstate contended that the summons and complaint had been "misindexed" by an employee who "did not realize the time sensitive nature of the documents".

Plaintiff opposed the motion on the basis that Allstate had established neither a reasonable excuse for its default nor a meritorious defense to the hospital's claim.  According to Allstate, plaintiff's assignor was not an "eligible injured person" entitled to no-fault coverage benefits because he was not driving either of the two covered autos listed on his grandmother's policy and did not reside with her.  Plaintiff counterargued that Allstate was precluded from raising that defense because it had not issued a denial of claim (NF-10).

In granting Allstate's motion and vacating the default, Nassau County Supreme Court Justice Randy Sue Marber ruled:
The Plaintiff's attorney argues that the defense to the action that the Defendant raises is precluded due to Allstate's failure to have issued a Denial of Claim. In response to this argument, the Defendant's attorney asserts that the insurer's failure to timely disclaim coverage does not preclude it from later denying liability on the ground that the insurance agreement itself does not cover the particular automobile or person. In support of this proposition, the Defendant's counsel cites Zappone v. Home Ins. Co., 55 NY2d 131, 138 (1982). Additionally, the Defendant's counsel points out that at no time did the Defendant ever admit that it provided coverage for the subject vehicle. The affirmation submitted by the Defendant's counsel, dated January 26, 2009, in support of the Order to Show Cause specifically states in paragraphs 14 and 15 that the Plaintiff's assignor drove a 2005 Ford and that the policy insured a 1999 Nissan Maxima and a 1997 Acura. The Defendant's counsel argues that the Plaintiff has failed to put forth any evidence to show that the Plaintiff's assignor was an eligible injured person covered under the subject policy. 

This Court, in its discretion, accepts the Defendant's explanation for the delay incurred in answering the Summons and Complaint in this matter as an excusable delay. Additionally, the Defendant has provided a meritorious defense and sufficient evidence that the default was not willful. The delay was short and the Plaintiff will not be prejudiced by allowing the Defendant to interpose an answer. 
Whether someone qualifies as an "eligible injured person" under the prescribed PIP endorsement is a coverage defense not subject to the 30-day pay or deny preclusion rule.

Things That Go Boom -- Court Affirms Coverage for Loss Due to Contaminants Released Into Atmosphere by Explosion at Nearby Chemical Plant

Trupo v. Preferred Mut. Ins. Co.

(4th Dept., decided 2/6/2009)

On January 5, 2002, the Diaz Chemical Corporation facility in the Village of Holley, Orleans County, New York, accidentally released a mixture consisting primarily of toluene, water (steam), and 2-chloro-6-fluorophenol (CFP) into outdoor air. Soon after the chemical release, residents of nearby homes complained of acute health effects such as sore throats, headaches, eye irritation, nosebleeds, and skin rashes.

The "release" occurred when a pressure build-up in heated storage vessel at the Diaz facility caused a pressure disc to rupture. The rupture resulted in a chemical discharge that visibly contaminated surfaces in the nearby neighborhood and produced odors that were reported as far as 12 miles away. According to Diaz, approximately 80 gallons of liquid were released. The mixture was reported to be mostly water (in the form of steam), toluene, and CFP. Droplets of CFP deposited on cars, houses, and other surfaces to the east-northeast of Diaz. On January 6 and 7, fifteen to twenty families voluntarily relocated with assistance from Diaz.

Many if not all of these families made first-party property coverage claims to their homeowners insurers. The Trupos were one such family. They claimed that their home and contents were damaged by the explosion and release of CFP, a contaminant. Many of the insurers to which those claims were submitted, including Preferred Mutual Insurance Company, denied coverage based on a variety of reasons. Preferred Mutual's reasons included that there was no direct physical loss from a covered peril, including explosion, and the policy's "Wear and Tear" exclusion, which negated coverage for, among other things, loss that resulted from contamination.

In AFFIRMING the motion court's denial of Preferred Mutual's motion and granting of the plaintiffs' cross motion for summary judgment, the three-justice majority (Centra, Green and Gorski) of the Fourth Department ruled that an explosion was the cause of the damage to plaintiffs' property and the policy's wear and tear exclusion was ambiguous and did not apply:
The policy issued by defendant provided coverage for "direct physical loss" caused by certain perils, including explosion. We agree with plaintiffs that the incident at the chemical plant constitutes an explosion under the policy and that the alleged contamination of their home was caused by that explosion. We further agree with plaintiffs that the exclusion relied upon by defendant, entitled "Wear and Tear," does not apply to this case. Pursuant to that exclusion, defendant would "not pay for loss which results from wear and tear, marring, deterioration, inherent vice, latent defect, mechanical breakdown, rust, wet or dry rot, corrosion, mold, contamination or smog" (emphasis added). We reject defendant's contention that, because the damage to plaintiffs' home arises out of pollution or contamination, the exclusion for "Wear and Tear" applies. Rather, we conclude that the exclusion in question is ambiguous and thus should be construed in favor of plaintiffs, the insureds (see generally White v Continental Cas. Co., 9 NY3d 264, 267; Belt Painting Corp. v TIG Ins. Co., 100 NY2d 377, 383). The title "Wear and Tear" would lead an average person to believe that the exclusion for "contamination" therein included only contamination that occurred over time, rather than a sudden occurrence such as the incident here.
The two-justice dissent (Scudder and Pine), while agreeing that the chemical plant incident constituted an "explosion" under the policy and that the alleged contamination of plaintiffs' home was caused by that explosion, disagreed that the policy's wear and tear exclusion was ambiguous and did not apply to negate coverage.  "Plaintiffs suffered a loss from contamination, and the policy specifically excludes loss resulting from contamination. '[U]nambiguous provisions of an insurance contract must be given their plain and ordinary meaning[.]'"  The dissent also disagreed with the majority that the "Wear and Tear" title of the exclusion rendered it ambiguous:
The majority focuses on the title of the paragraph containing the exclusion in question and concludes that it would lead an average person to believe that the exclusion for contamination was only for contamination that occurred over time. We disagree. Rather, we apply the principle of statutory construction that titles are given little weight. "The title of a statute may be resorted to . . . only in case of ambiguity in meaning, and it may not alter or limit the effect of unambiguous language in the body of the statute itself" (McKinney's Cons Laws of NY, Book 1, Statutes § 123 [a]). Inasmuch as the language in the exclusion in question is unambiguous and does not limit the exclusion to contamination that occurs over time, we decline to add such limiting language.
The majority also affirmed the motion court's decision denying that part of plaintiffs' cross motion for damages in the amount of approximately $144,000, and instead ordering a hearing on damages.

Friday, March 27, 2009

Coverage Granted for Hardwood Floor Damage from Longstanding Water "Misting" from Split Sub-Floor Pipe

Flynn v. Allstate Indem. Co.

(Watertown City Ct., decided 3/24/2009)

WARNING:   Reading this decision may cause cognitive vertigo.  There's a lot in here for a $3,000 water damage case.  Click the case link at your own risk.

Plaintiff insureds had $200,000 in improvements done to an older house.  Leave in September 2007 for 6-7 weeks.  Come back in late October.  Discovers their dining room floor had buckled in early November.  Their contractor comes out in mid-November and discovers "major pipe leak with water going all over the place".  Recommends that the insureds call a plumber.  Plumber comes in early December and finds a pipe beneath the dining room floor had split and was spraying water onto the sub-floor over a six to seven foot radius.  Puts a temporary patch on the leak.  Insureds finally report the loss to their Allstate agent on December 21, 2007.

Allstate inspected the loss and denied coverage, based on the policy's exclusion of water damage due to:
18.  Seepage, meaning continuous or repeated seepage or leakage over a period of weeks, months, or years, of water, steam or fuel:
a)  from a plumbing, heating, air conditioning or automatic fire protection system or from within a domestic appliance; or
b)  from, within or around any plumbing fixtures, including, but not limited to, shower stalls, shower baths, tub installations, sinks or other fixtures designed for the use of water or steam.
Allstate's claims adjuster did not inspect the patched pipe, but spoke with the plumber, who told him that he had found a "split on the very top of the pipe...spraying mist onto the sub-floor above this split covering ten foot diameter[.]"   From his investigation, the adjuster concluded that the loss had not been "sudden" and that the "misting" which led to a steady saturation of the structures above it, including over time the affected floor, met the policy's definition of "seepage" excluded by the policy, i.e., "...continuous...leakage over a period of weeks...of water...(a) from plumbing[.]"  In defense of its denial, Allstate also argued that the policy does not cover damage due to "seepage" of water, but rather, only water damage resulting from a "burst" pipe.

Following Allstate's denial, the insureds had the dining room floor repaired.  The cost of repairs was $3,000, but the flooring contractor, although he had prepared a bill, decided under the circumstances that he would not charge the insureds for that repair work.

After conducting an evidentiary hearing or trial, Watertown City Court Judge James Harberson awarded plaintiff $3,000 plus costs.  Based on New York pollution exclusion case law addressing the meaning of "sudden and accidental" in liability coverage contexts, Judge Harberson found an "ambiguity in the policy language involving the 'seepage' term and 'sudden and accidental.'"  Relying heavily on the Second Department's 2006 decision in Hudson v Allstate Ins. Co., 25 AD3d 654 (2nd Dept. 2006), the court found that that the plumbing system pipe failure was covered under plaintiff's policy as a "sudden and accidental escape of water...from a plumbing...system" as provided under the exception to Exclusion # 15, which negates coverage for:
15. a) wear and tear, aging, marring, scratching, deterioration, inherent vice, or latent defect;
b) mechanical breakdown;
c) growth of trees, shrubs, plants or lawns whether or not such growth is above or below the surface of the ground;
d) rust or other corrosion, mold, wet or dry rot;
e) contamination, including, but not limited to the presence of toxic, noxious, or hazardous gases, chemicals, liquids, solids or other substances at the residence premises or in the air, land or water serving the residence premises;
f) smog, smoke from the manufacturing of any controlled substance, agricultural smudging and industrial operations;
h) insects, rodents, birds or domestic animals. We do cover the breakage of glass or safety glazing materials caused by birds; or
i) seizure by government authority.

If any of (a) through (h) cause the sudden and accidental escape of water or steam from a plumbing, heating or air conditioning system, household appliance or fire protective sprinkler system within your dwelling, we cover the direct physical damage caused by the water or steam.  If loss to covered property is caused by water or steam not otherwise excluded, we will cover the cost of tearing out and replacing any part of your dwelling necessary to repair the system or appliance. This does not include damage to the defective system or appliance from which the water escaped.
As the Second Department had in Hudson, Judge Harberson ruled that this exception to Exclusion # 15 created a latent ambiguity in the policy's Exclusion # 18, the seepage exclusion.

Although plaintiffs did not present any evidence of what caused the pipe beneath their dining room's floor to split, the court found "[i]t ... reasonable to observe that, as described by the plumber, such a split in the pipe could be due to any of the conditions listed at 15(a)(b) or (d) allowing the 'sudden and accidental escape of water' from this split in the top of the pipe for which the policy will cover in such case."

A strong argument could be made that inasmuch as the language the court relied upon is from an exception to an exclusion, the court erred in not requiring the insured to prove the cause of the pipe splitting.  Rather, the court ruled that Allstate "fail[ed] to investigate the cause of the pipe's failure and exclude as a cause the conditions listed at paragraph 15 a), b) and d) for it[.]"  Although insurers must prove the applicability of policy exclusions, insureds always carry the burden of proving inclusionary policy provisions.  An exception to an exclusion can be considered an inclusionary provision for which an insured must shoulder the burden of proof. 

On the issue of damages, while not disputing the reasonableness of the $3,000 repair cost figure, Allstate argued that because the flooring contractor had not billed the insureds for the $3,000 in repairs, the  insureds  had suffered no damages.  In an interesting use of Bi-Economy Mkt., Inc. v Harleysville Ins. Co. of NY, 10 NY3d 187, defense counsel for Allstate also argued that plaintiff's proof of "consequential damages" (which they weren't) was speculative and, thus, legally insufficient.  In angrily rejecting Allstate's arguments, Judge Harberson ruled:
[T]he $3,000 is still due to be paid without regard to whether someone else gave him $3,000 (a bank loan or private loan, or as in this case, a gift of the value of the labor and materials).

* * * * *

The Court finds the defense argument that no damages were due because the contractor, Mike Goodwin, decided not to send the $3,000 bill for the work to be spurious and for Allstate to attempt to piggyback on this generosity of Mr. Goodwin to make itself a beneficiary of it to avoid paying the $3,000 due under the policy is also reprehensible and outrageous conduct engaged in by Allstate Insurance Company. 
Water damage claims are tough.  There is usually more than one policy provision or exclusion that has the potential of applying to affect the coverage outcome. Is a pipe's splitting not a bursting?  Is it possible for a pipe to leak and the first drop of water to escape gradually rather than suddenly?   I think I understand the underwriting intent underlying the seepage exclusion, but both the Second Department and this court validly observed what appears to be an inherent conflict between the seepage exclusion and the "sudden and accidental escape of water" exception to the wear and tear, etc. exclusion.  Things that make you go hmmm.

Anyone other than me get the irony of this case's venue?

That Was Just a Good Day -- Surveillance Supports Denial of Workers' Compensation Claimant's Future Wage Replacement Benefits

Matter of Robbins v. Mesivtha Tifereth Jerusalem

(3rd Dept., decided 3/12/2009)

I'm not a doctor, and I don't play one on TV.  I haven't even stayed in a Holiday Inn Express recently, but even I know that reaching, turning and bending while washing an all terrain vehicle, walking a large dog without putting any weight on one's cane, fishing and casting in a stream while wearing hip boots, climbing a rocky embankment, carrying a backpack, and crawling under a truck to repair it are inconsistent with a finding of permanent, total disability.

Remarkably, the Workers' Compensation Law Judge did not, even when presented with surveillance video showing the claimant doing all these things.  Upon review, the Workers' Compensation Board reversed, finding that claimant had intentionally misrepresented the degree of his disability in order to obtain compensation benefits. The Board imposed a mandatory disqualification penalty of $35,059.10, and permanently disqualified claimant from receiving any further wage replacement benefits pursuant to its discretionary authority.

On the claimant's appeal, the Third Department AFFIRMED the penalty and disqualification, holding:
A determination that a claimant has violated Workers' Compensation Law § 114-a will be upheld if it is supported by substantial evidence (see Matter of Losurdo v Asbestos Free, 1 NY3d 258, 266 [2003]; Matter of Kestler v Old Castle Callanan Indus., Inc., 46 AD3d 957, 958 [2007]). Here, the testimony of the independent medical examiner, Robert Zickel, fully supported the carrier's assertion that claimant misrepresented his daily activities. In particular, Zickel testified that claimant's activities depicted on surveillance videos which included footage of claimant reaching, turning and bending while washing an all terrain vehicle, walking a large dog without putting any weight on his cane, fishing and casting in a stream while wearing hip boots, climbing a rocky embankment, carrying a backpack and crawling under a truck to repair it indicated that any disability that he had was minor or mild. Zickel maintained that the depicted activities were "not consistent" with claimant's description of his daily activities upon examination. Moreover, claimant's treating physician, Barry Scheinfeld, indicated that based upon claimant's representations, he was under the impression that claimant was unable to perform the types of activities listed above. In our view, the Board's decision is supported by substantial evidence and, thus, it will not be disturbed (see Matter of Kestler v Old Castle Callanan Indus., Inc., 46 AD3d at 958; Matter of Dishaw v Midas Serv. Experts, 27 AD3d 921, 922 [2006]; Matter of Tomlin v L & B Contr. Indus., 307 AD2d 682, 683 [2003]; Matter of Phelps v Phelps, 277 AD2d 736, 738-739 [2000]). 
Never a good thing when one's own treating physician says, "Really?  I was under the impression he couldn't do those things." 

Importing the Duty to Procure Insurance

Larry E. Knight, Inc. v. QBE Ins. Corp.

(1st Dept., decided 3/17/2009)

In this decision, the First Department reminds that the duty to indemnify is distinct from, and does not inherently contain, a duty to insure, and when a subcontract contains no obligation on the part of the subcontractor to procure insurance for the general contractor, the general contractor cannot be deemed an additional insured under the additional-insured endorsement of the subcontractor's commercial general liability policy.  "Plaintiffs' argument that the indemnity provision in the Knight-JEM subcontract imports with it a duty to insure fails[.]"

Choice of Law by Judicial Estoppel

Appalachian Ins. Co. v. Di Sicurata

(1st Dept., decided 3/17/2009)

Question:  If a liability insurance policy does not contain a choice-of-law clause and covers risks in multiple states, which state's law should govern the interpretation application of policy provisions?  Answer:  the state of the insured's "domicile", meaning the principal place of business of a corporate insured.  If an insured has previously obtained judicial rulings in its favor on a particular state being its principal place of business, the doctrine of judicial estoppel applies to preclude the insured from relitigating that issue. 

So held the First Department in this case, with respect to General Electric Company:
We have held that a contract of liability insurance is "governed by the law of the state which the parties understood was to be the principal location of the insured risk ...'" (Certain Underwriters at Lloyd's, London v Foster Wheeler Corp., 36 AD3d 17, 22-23 [2006], affd 9 NY3d 928 [2007]), that "where it is necessary to determine the law governing a liability insurance policy covering risks in multiple states, the state of the insured's domicile should be regarded as a proxy for the principal location of the insured risk" (id. at 24) and that a corporate insured's domicile is the state of its principal place of business (id. at 25). The contracts of liability insurance at issue here, which do not contain choice-of-law clauses and cover risks that are spread through multiple states, were purchased by GE, which, having obtained rulings in its favor as to its principal place of business (see e.g. Gafford v General Elec. Co., 997 F2d 150, 161-163 [6th Cir 1993]; Northeast Nuclear Energy Co. v General Elec. Co., 435 F Supp 344, 347-348 [D Conn 1977]), is judicially estopped from denying that its principal place of business is New York (see e.g. D & L Holdings, LLC v RGC Goldman Co., 287 AD2d 65, 71 [2001], lv denied 97 NY2d 611 [2002]; Bankers Trustee Co. Ltd. v First Mexican Acceptance Corp., 273 AD2d 81, 81 [2000], lv denied 95 NY2d 766 [2000]). Accordingly, we find New York law controlling in this matter. 
Believe it or not, all state courts don't agree on insurance coverage issues -- liability or otherwise.  An insured may want the law of another state to apply to a particular coverage dispute because that law -- usually case law -- is more favorable to the insured on the disputed issue or issues at hand.  In this case, GE apparently sought unsuccessfully to have the law of a state other than New York apply to the coverage issues in this declaratory judgment action. However, in other cases, GE had previously convinced the US 6th Circuit Court of Appeals (Kentucky, Michigan, Ohio and Tennessee) and US District Court of Connecticut that its principal place of business was New York.  New York it was, then, ruled the First Department.

Systemic Risk -- Federal Regulation of Large Insurance Companies

White House Asks U.S. Regulator For Large Insurers
    * By Arthur D. Postal
     P&C National Underwriter
     Published 3/26/2009

The Obama administration today asked Congress for authority to create a federal regulator with authority to administer large insurance companies.

Under the proposed scheme, federal administration would be based on “the financial system’s interdependence with the firm, the firm’s size, leverage (including off-balance sheet exposures), and degree of reliance on short-term funding.”

Another characteristic will be the importance of the firm “as a source of credit for households, businesses, and governments, and as a source of liquidity for the financial system.”

In testimony before the House Financial Services Committee, Treasury Secretary Tim Geithner said what he is asking Congress today is only the first step. Mr. Geithner's comments also included is remark that,"I think there is a good case for introducing an optional federal charter for insurance companies."

The comprehensive framework for regulatory reform will cover four broad areas: systemic risk, consumer and investor protection, eliminating gaps in our regulatory structure, and international coordination.

“In the coming weeks, I will present detailed frameworks for each of these areas,” he added.

Secretary Geithner outlined the administration’s plans in testimony before the House Financial Services Committee.

“Let me be clear: the days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end,” said Mr. Geithner.

We must cover financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the FDIC,” he added.

“This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk to our economy,” he said.

He said that proposed legislation will be submitted to provide such a U.S. regulator with authority to put such firms into conservatorship or receivership and, “The regulator of these entities will also need a prompt, corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to that of the FDIC with respect to its covered agencies.”

The institutions that would be covered under such authority will be “financial institutions that have the potential to pose systemic risks to our economy but that are not currently subject to the resolution authority of the Federal Deposit Insurance Corporation.”

“This would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk to our economy,” he said.

In a research report, the Concept Capital, a New York-based investment management and research firm, said the proposal by Secretary Geithner aims to “give a systemic risk regulator unprecedented power over financial firms of all types.”

That means, the report said, “federal regulators will have the power to examine the books, capital position and leverage at insurance companies, hedge funds, private equity firms, and any other financial firm.

“The idea is to focus only on those financial firms that could pose a systemic risk to the financial system,” the report said.

The report noted that Secretary Geithner is not identifying which agency would be the systemic risk regulator, though House Financial Services Chairman Barney Frank, D-Mass., wants to give the job to the Federal Reserve.

New York Insurance Superintendent Eric Dinallo, reacting to Mr. Geithner’s testimony, said what is being sought is “some kind of oversight and resolution of the holding companies and lightly regulated parts of these conglomerates, like we saw at American International Group.” He called it a serious plan.

Mr. Dinallo added, however, that, “I believe that insurance companies standing alone, even very large ones, don’t present the same systemic risk as the financial supermarkets or large, leveraged institutions. I think we have to parse this out a bit. It wasn’t the insurance companies that caused this problem at AIG.”

The National Association of Insurance Commissioner issued a statement saying  they were "encouraged" by Mr. Geithner's remarks "that this proposal will maintain the important role that state regulators play in supervising insurance companies. We agree with his assetion that financial institutions must not be allowed to 'cherry pick' among competing regulators in search of the lowest standards and constraints."

NAIC said it agrees there is a need to address how resolutions would operate for financial structures and activities outside the existing FDIC system for banks and state guaranty fund system for insurers, adding that "any expansion of federal resolution authority should not displace those proven systems."

Tuesday, March 24, 2009

New York State Insurance Frauds Bureau's 2008 Annual Report

Recently posted to the New York State Insurance Department's website is the 2008 Annual Report of the New York State Insurance Frauds Bureau.

 The report cites the following 2008 highlights:
  • Investigations conducted by the Frauds Bureau resulted in 755 arrests in 2008, the highest number recorded since 2004.
  • The number of criminal convictions obtained by prosecutors in Frauds Bureau cases totaled 402 during 2008.
  • The Bureau’s Major Case Unit handled complex cases involving no-fault, commercial rate evasion, health care fraud and workers’ compensation premium fraud. The Unit effected 126 arrests in 2008.
  • New York State received more than $9 million in refunds and $78,551 in fines from five health care providers who inappropriately billed United HealthCare, administrator of the Empire Plan.
  • Arrests for auto give-ups spiked by 35% over the past year, up from 96 in 2007 to 130 in 2008. Fraud experts believe that high lease payments and the downturn in the economy may be factors.
  • No-fault fraud referrals increased by 10% from 2007 to 2008.  At the same time, the Bureau posted 154 no-fault arrests, a 52% year-to-year increase.
  • A 19-month investigation led to the indictment of 62 individuals accused of staging more than 40 auto accidents over a three-year period. The investigation was conducted by the Frauds Bureau and other members of the FBI New York Health Care Fraud Task Force.
Compiled data from the report include:

IFB Reports Received

IFBs Received
Auto Unit Totals^
Workers Comp Unit Totals
Medical/No-Fault Unit Totals^^
Arson Unit Totals
General Unit Totals
Grand Total

^  Data prior to 2008 reflects Auto and No-Fault Unit totals.
^^  Data prior to 2008 reflects Medical Unit total only.

IFB Investigations Opened

Auto Unit Totals^
Workers Comp Unit Totals
Medical/No-Fault Unit
Arson Unit Totals
General Unit Totals

The report also sets forth the following "Directions for 2009": 

A.  Auto Give-Ups/Auto Arson

Arrests in cases involving auto give-ups spiked by 35% over the past year in New York State, up from 96 in 2007 to 130 in 2008. Fraud experts believe that the downturn in the economy may be a factor in the uptick, as owners abandon their cars or in many cases arrange to have them burned and then report them stolen in an effort to collect the insurance payout. As the economy worsens, car owners can see give-ups as a means to avoid steep car payments or alleviate general debt. The Frauds Bureau will carefully monitor the auto insurance market during the coming year to keep abreast of fraud trends.

B. Special Investigations Unit Examinations

The Frauds Bureau’s examiner staff performed a targeted audit of the SIU of a large auto insurer in 2008 and a Report on Examination will be issued in 2009. The Bureau will continue its examination of SIUs in the coming year. Insurers are selected for targeted examinations from those that have filed a Fraud Prevention Plan with the Department and have a history of complaints and/or concerns pertaining to their SIU operations and Fraud Plans.

The Frauds Bureau also supports and assists the Life, Health and Property Bureaus with market conduct examinations as requested by those Bureaus. The Frauds Bureau will continue to assist the regulatory bureaus with examinations in 2009.

Court Sets Scope of Discovery in Intoxication Exclusion Defense to Hospital's No-Fault Billing Action

Westchester Medical Center a/a/o Donald Gjelaj v. State Farm Mut. Auto. Ins. Co.

(Sup. Ct., Nassau Co., decided 2/25/2009)

In October 2007, the Second Department modified Nassau Supreme's order to deny plaintiff's motion and State Farm's cross motion for summary judgment, holding that State Farm had not proven the assignor's intoxication as a matter of law.

The parties returned to Nassau County and proceeded with discovery.  State Farm served plaintiff hospital with document demands, interrogatories and a notice to depose the assignor.  When plaintiff didn't respond, State Farm to move to compel, and plaintiff cross-moved for a protective order limiting State Farm's Demand for Interrogatories and striking its Notice for Discovery and Inspection.  With respect to State Farm's notice to depose the assignor, plaintiff argued that the assignor was a non-party witness over whom the hospital had no control or any contact or communication after his discharge.

In granting some relief to each party,  Nassau County Justice William LaMarca:
  • ordered plaintiff to respond to State Farm's interrogatories that sought the names, addresses, telephone numbers and license numbers of those individuals who were involved in the patient's treatment or laboratory testing; 
  • struck State Farm's notice to depose the assignor based on the fact that it directed plaintiff to produce a person who was not an employee or agent of the hospital;
  • struck State Farm's document demands for HIPAA authorizations, police reports, MV104 forms, and copies of all criminal charging documents and court paper work, holding that many of the demanded documents were available to State Farm as public records; and
  • directed the hospital to provide responses to all demands for health service and treatment information pursuant to the authorization in the prescribed no-fault bill (Hospital Facility Form).

Court Upholds Payment of Acupuncture Services at Chiropractic Rates

Midwood Acupuncture, P.C. a/a/o Yensi Alan v. Allstate Ins. Co.

(NYC Civil, Kings Co., decided 3/6/2009)

Plaintiff and Allstate mutually stipulated that plaintiff proved its prima facie case and the defendant timely denied the claims. The acupuncture bills and denials were admitted into evidence, and plaintiff rested.  Allstate then moved to dismiss plaintiff's case, contending that an insurer is entitled to remit payment at the chiropractic rate indicated in the Workers' Compensation Fee Schedule. Plaintiff argued in opposition that Allstate was required to reveal its procedures for choosing the rate and the calculation of the amount. The court reserved its decision.

Allstate then presented its claim representative, who testified that the Workers' Compensation Fee Schedule is the tool used to pay healthcare providers. Since that schedule does not address licensed acupuncturists, Allstate had compared the educational and licensing requirements and found that the chiropractic requirements are closest to those for licensed acupuncturists. Therefore, the plaintiff was paid at the chiropractic rate. On cross-examination, the claim representative testified that he was not the representative who denied the plaintiff's claims, but indicated that the representative processed and issued the claims in accord with Allstate's policies and procedures, including using the Workers' Compensation Fee Schedule.

In granting judgment in favor of Allstate and dismissing the complaint, Kings County Civil Court Judge Genine Edwards held:
After due deliberation of the credible evidence submitted, this Court finds that the defendant shouldered its burden of producing a proper grounds for denying full payment of the no-fault benefits based upon the Workers' Compensation Fee Schedule. Great Wall Acupuncture, 16 Misc 3d at 23; Ava Acupuncture, P.C., 17 Misc 3d at 41; Ops Gen. Counsel NY Ins. Dept. 10-06-04. The plaintiff did not rebut this defense.
So it appears, at least in Judge Edwards' court, that an insurer has the burden of producing a witness to explain why acupuncture services were paid at chiropractic rates. Relying solely on the submission of the Workers' Compensation Fee Schedule might not be enough.