An Insurer's Actions May Excuse Mitigation Requirements

Sat, 13 Mar 2010 03:42:52 GMT

(Note: This Guest Blog is by Corey Harris, an attorney with Merlin Law Group in the Tampa, Florida, office. This is part of a series he is writing on post-loss duties).

I recently took the deposition of an independent adjuster who worked on behalf of one of the larger insurers in the state. While most of the deposition was pretty standard, I was shocked when the adjuster said that he had advised the homeowners to stop making temporary repairs to their home. When I asked him to explain why he did not think it was a good idea for temporary repairs to the roof and exterior of the building to be completed, he answered that coverage had not been established yet and he did not think the repairs should be made until it was.

This exchange surprised me for a number of reasons. First, it is a fundamental part of insurance that a policyholder has a duty to take reasonable steps to mitigate damages. Making temporary repairs to a leaking roof would seem like a logical place to start, especially in Florida during the middle of the rainy season. Second, I was surprised that this individual did not seem to understand the potential problems that his advice could have caused.

In my last post, I detailed some of the potentially harsh consequences of a policyholder’s failure to properly mitigate damages, however, an insurer may be estopped from arguing as much if its actions encouraged or led to the insured’s failure to mitigate. See for example Kubista v. Romaine, 549 P.2d 491 (Wash 1976).

An insurer’s agents and representatives can bind the insurer through their actions and statements. See Old Republic Ins. Co. v. Von Onweller Const. Co., 239 So.2d 503, 504 (2d DCA 1970); Hughes v. Pierce, 141 So.2d 280, 284 (Fla. 1st 1961). Thus, if an adjuster tells a policyholder to stop making temporary repairs, it is only logical that the insurer should not be able to later deny coverage based on a failure to mitigate. Furthermore, the insurer may be liable for any further damages that the insured property sustained as a result of the adjuster’s instruction to stop making repairs, even if these damages are not covered under the policy.

The homeowners in my case were lucky that no additional damages occurred as a result of their stopping repairs at the insistence of the adjuster. However, the insurer and adjuster are lucky as well, because they could have been held liable for any resulting damages. This is why educating both adjusters and policyholders about the proper steps to take after a loss is very important to both sides, and failing to do so can cause more coverage disputes than necessary.

Washington Court of Appeals Reiterates, In Two Recent Opinions, That Where Policy Language Is Clear, It Will Be Enforced As Written

Fri, 12 Mar 2010 23:12:55 GMT

In two recent opinions, one from Division One and one from Division Three, the Washington Court of Appeals reiterated that when policy language is clear, it will be enforced as written.

In Greenfield v. Western Heritage Ins. Co., 2010 Wash.App. Lexis 467 (March 2, 2010), the court rejected an insured’s attempt to extend his theft coverage to cover funds lost due to the commingling of funds by and subsequent bankruptcy of the debtor. Mr. Greenfield consigned a truck for sale to Ron Medlen. Upon sale of the truck, Medlen was to pay Greenfield $15,000. The truck was sold for $16,550, and the money deposited into Medlen’s business bank account. Mr. Medlen’s bank subsequently seized Medlen’s business bank account and Medlen filed bankruptcy, reducing Greenfield’s rights to that of an unsecured creditor in the bankruptcy and essentially depriving him of the proceeds of the truck sale.

Under the Physical Damage Coverage section of Greenfield’s commercial garage policy, Greenfield had coverage for loss caused by theft. Theft was not defined in the policy. Greenfield argued that Medlen’s actions in commingling the sales proceeds with the other funds of his business violated a Washington State statute requiring that the proceeds be put into a separate trust account for Greenfield, and thus constituted a theft under the policy. The court found that by its plain language, the policy provided coverage for physical damage “to” a vehicle, and Greenfield’s claim was not for theft of the vehicle, but loss of commingled funds. The court further held that even if the commingling of funds in violation of the State statute could be relied upon to establish theft under the policy, construed broadly, the term “theft” still requires an unlawful or wrongful taking with criminal intent. Because Greenfield failed to show Medlen intended to deprive Greenfield of the truck or the sale proceeds, the argument failed.

Greenfield then made a confusing argument about how the use of the phrase “theft or conversion” in another part of the policy somehow created an ambiguity as to the meaning of theft, and the ambiguity should be read in Greenfield’s favor to establish coverage. The court also rejected this argument. While the court found that the policy should be “construed liberally, in order to provide coverage whenever possible,” it also stated that “we cannot, under the guise of finding an ambiguity, rewrite an insurance policy to provide coverage where the plain language of the policy does not provide coverage.” Lexis pp. 4, 8.

In Black v. National Merit Ins. Co., 2010 Wash.App. Lexis 378 (March 1, 2010), the court rejected an attempt to stretch the auto policy of a passenger to apply to an accident caused by the driver of a vehicle not owned or controlled by the passenger. Norman Black, Janis Warner, Cecilia Black, and Lester Black (“the Blacks”) were severely injured when their car collided with a truck driven by Marissa Goodell, in which Tracey Radcliffe was a passenger. The Blacks argued that Goodell and Radcliffe were joint tortfeasors, although no evidence showed that Radcliffe did anything to affect Goodell’s driving. The Blacks settled with Radcliffe, and Radcliffe assigned her rights under an auto insurance policy issued by National Merit Ins. Co. to Radcliffe’s parents. Radcliffe was insured as a family member. It was undisputed that the vehicle driven by Goodell was not owned by any insured.

Before proceeding with its analysis, the court pointed out that if a policy’s language is clear and unambiguous, the court must enforce it as written, and a policy is only ambiguous when it is “fairly susceptible to two different interpretations, both of which are reasonable.” Lexis p. 4. [Citations omitted.] The Blacks attempted to establish coverage by asserting that Radcliffe was a covered person under one of two alternative definitions:

1. You or any family member with respect to the ownership, maintenance or use of any covered auto or trailer.

2. Any person using your covered auto.

Lexis p. 6.

Under the first definition, “any covered auto” was not defined in the policy. Using two dictionary definitions of “cover” that equated “covered” with “insured,” the Blacks argued that any auto that has liability insurance qualifies as “any covered auto”. The court rejected this interpretation as unreasonable. Pointing out that dictionary definitions must be used in the context of the policy, the court found the term “covered” was used in several parts of the policy, and referred only to those things that were covered under the subject policy, not any policy. Lexis pp. 9-11.

The Blacks then attempted to establish coverage under the second definition, arguing the subject vehicle qualified as “your covered auto” under the following policy definition:

“5. Any non-owned auto which is a private passenger auto, a pick-up, van or panel truck, motorhome, or trailer not owned by you or a family member or furnished or available for regular use while in your custody, possession, or being operated by you or any family member.

Lexis pp. 13-14.

The Blacks argued the phrase “while in your custody, possession, or being operated by you or any family member,” applied only to the immediately preceding phrase “furnished or available for regular use,” essentially arguing that “your covered auto” thus included any auto not owned by the insureds. The court again emphasized that a policy is only ambiguous when it is susceptible to two different, but reasonable interpretations, and rejected the Blacks’ interpretation as one that no purchaser of insurance would deem reasonable. The Blacks’ interpretation would essentially assert that National Merit “took on risk for a near universe of vehicles,” which is unreasonable. Lexis pp. 15-17.

The Black case is significant for its emphasis on the point that dictionary definitions are not to be applied arbitrarily to interpret words in a policy that are undefined. Dictionary definitions are helpful, but they must be applied reasonably and make sense in the context of the policy, which under Washington law is to be construed as a whole.

The Greenfield and Black cases reemphasize the point that while policies will be construed broadly in Washington in favor of coverage, they are not to be construed to the point of stretching them beyond what is intended to be covered by the clear language of the policies.

New Regulatory Approaches to Short Selling in the U.S. and the EU

Fri, 12 Mar 2010 22:05:51 GMT

By: Kay A. Gordon, Dr. Wilhelm Hartung, Cary J. Meer, Philip J. Morgan, Mark D. Perlow, Neil Nick Robson, Richard Guidice, Jr

Changes in the regulatory approach to the short selling of listed securities have recently been announced in both the United States (U.S.) and the European Union (EU). In the U.S., rule amendments were recently adopted by the Securities and Exchange Commission that generally restrict market participants' ability to sell short listed securities whose price has dropped by at least 10% in a single day. In the EU, a new regulatory proposal would (to the extent adopted by the EU member states) require private disclosure of net short positions above a 0.2% threshold to the applicable regulator, and public disclosure to the market of such positions above a 0.5% threshold. We summarize in this alert what these changes entail and what each will mean for market participants.

To view the complete alert online, click here.

Can an Insured Recover Under a Flood Policy and an All Risk Homeowners Policy for the Same Damage?

Fri, 12 Mar 2010 12:37:42 GMT

In Louisiana, the answer is probably “yes.” The FC&S pondered this question in its March 2010 Dec Page report titled, “Recovery Under Flood Policy and Homeowners Policy?” The highlighted case was Lightell v. State Farm Fire & Cas. Co., 2009 WL 4505942 (E.D.La. 2009). The article noted the significant facts and issues as follows:

The insured suffered property damage due to the wind and flood caused by Hurricane Katrina. They collected partial payment of their policy limits from both the homeowners and flood insurance policies. Believing that the payments were not indicative of the extent of the actual damage to the home, the insured filed a lawsuit against the insurers. State Farm, the homeowners insurer, filed a motion for summary judgment.

State Farm asserted that the insured is estopped from recovery related to wind claims because he previously alleged that he was entitled to flood policy limits due to the total destruction of the property. And, the insurer said that the insured has the burden of proving the damage was caused by wind (a covered loss) as opposed to flood (not covered).

The Federal Court wrote an interesting section on estoppel, which arises in these types of cases, and the burden of proof. Regarding the estoppel issue, the Court noted:

Defendant argues that summary judgment is proper because according to Defendant, once Plaintiffs alleged, in a separate suit, that their property was totally destroyed by flood damage, Plaintiffs are estopped from asserting claims against their homeowners policy. In support of this argument, Defendant cites Webster v. State Farm, Civ. A. No. 07-4812, 2008 WL 2080907 (E.D .La. May 14, 2008).

…

The Webster Court held that even if a plaintiff received payments from his flood policy, the plaintiff is not estopped from making a claim pursuant to his homeowner's policy…The only stipulation the Court placed on the plaintiff's ability to recover from both the homeowner and flood policy was that the plaintiff's combined recovery cannot exceed the value of the property…Here, Plaintiffs' recovery from their flood policy has not exceeded the value of their property. Further, even if Plaintiffs were to receive their flood policy limits, it appears that they could actually recover at least partial payment from their homeowner's policy without exceeding the value of their property.

Therefore, although Plaintiffs are “not entitled to obtain a windfall double recovery by recharacterizing as wind damage those losses for which [they have] already been compensated by previously attributing them to flood waters”…there is no policy or legal principle preventing them from recovering for previously uncompensated, covered damage, without reference to the amount received under their flood policy...As a result, Plaintiffs are not estopped from asserting homeowner policy claims…

Regarding the burden of proof issue, the Court expressly disagreed with several other district court decisions, finding as follows:

…despite the multiple district courts that have held that the burden shifts back to the insured to segregate the damages between covered an non-covered perils, the United States Court of Appeals, Fifth Circuit, has held that this is not the case. In Dickerson v. Lexington Insurance Company, 556 F.3d 290 (5th Cir.2009), the Fifth Circuit stated,

‘[u]nder Louisiana law, the insured must prove that the claim asserted is covered by his policy. Once he has done this, the insurer has the burden of demonstrating that the damage at issue is excluded from coverage. Thus, once [the insured] proved his home was damaged by wind, the burden shifted to [the insurer] to prove that flooding caused the damage at issue, thereby excluding coverage under the homeowner's policy.’

…
Defendant states that the Fifth Circuit's interpretation of the burden shifting is simply dicta and that courts in the Eastern District addressing this issue have “uniformly” rejected this interpretation. However, this Court respectfully disagrees with the decisions of those courts-specifically Copelin, Weiser, and Nunez-to the extent that they did not follow Dickerson. This Court believes it is bound by the holding in Dickerson and that the analysis of the burden shifting test was not dicta… As a result, Plaintiffs' burden at trial will be to prove that they are entitled to additional payments to damage to their property. Plaintiffs do not have the burden of segregating the damages based on covered and non-covered perils.

I agree with this decision. The all risk policy gives the insurer the burden to prove the amount of the excluded damage. The insured should only have to prove the amount of damage that occurred during the policy period. Under an all risk or open-perils policy, the insurer then has the burden to prove that the loss was excluded in whole or part. If in part, the insurer should prove the amount of that excluded loss the policyholder does not have the burden to segregate the amount--that would essentially defeat the purpose of “all risk” coverage by making the policyholder prove the cause of the damage.

Some Courts have wrongfully turned this principle on its head, noting that the insured has the duty to prove the amount of the covered damage. That is true in a “named peril policy,” but that was not how the “all risk policy” was designed to work. Some Courts are getting this wrong because they are repeating case language from old, named peril cases.

The FC&S editor agrees with me and the Lightell Court:

Editor's Note: Courts will be answering coverage questions raised by Hurricane Katrina for quite some time. This case is noteworthy for its mention of the ruling in the 5th Circuit pertaining to which party, the insured or the insurer, has the responsibility to show what is excluded from coverage. As is customary, this burden falls on the insurer. (emphasis added)

I am certain this case will be analyzed in detail by insurance defense attorney, Stephen Pate, and myself at the Texas Windstorm Insurance Network Symposium Set May 11 in Dallas. In my respectful opinion, Texas law has these traditional principles mixed up as well. Many policyholders in Galveston and the Bolivar peninsula who suffered flood and wind damage from Hurricane Ike should hope that the Texas judges and their attorneys attend this symposium. Stephen Pate and I will set them straight on how burdens of proof in all risk policies were traditionally designed to work.

Have a great weekend!

Lehman Bankruptcy Examiner Cites Company's "Balance Sheet Manipulation"

Fri, 12 Mar 2010 10:34:38 GMT

According to the March 11, 2010 bankruptcy examiner’s report, the collapse of Lehman Brothers was a result of the deteriorating economic climate, exacerbated by Lehman’s executives, whose conduct ranged from "serious but non-culpable errors of business judgment to actionable balance sheet manipulation."

The Report was prepared pursuant to a January 2009 bankruptcy court order directing the trustee to appoint an examiner to investigate the events leading up to Lehman’s collapse. The examiner appointed was Anton Valukas of the Jenner & Block law firm.

The full report is nine volumes long, consisting of 2,200 pages, and can be found here. The executive summary (which alone is 239 pages long) can be found here. According to news reports, Valukas spent $38 million conducting his examination. He and his team interviewed more than 100 people and scrutinized more than 10 million documents, plus 20 million pages of e-mails from Lehman.

The examiner’s report states that as conditions worsened during 2008 and in order to "buy itself time," Lehman "painted a misleading picture of its financial condition." For example, the report states, that while reporting a significant loss at the end of the second quarter 2008, Lehman "sought to cushion the bad news by trumpeting that it had significantly reduced its net leverage ratio," while failing to disclose that it had been using an "accounting device" – known as Repo 105 – that had "no substance" and whose sole purpose was to allow Lehman to "manage its balance sheet."

The report states that Lehman neither disclosed its use of nor "the significance of the use of the magnitude of its use of" Repo 105, to the Government, to rating agencies, to investors or even to its own Board. Its auditors were aware of but did not question the transaction. The Repo 105 balance sheet manipulation is summarized on the WSJ.com Deal Journal blog, here.

The examiner concluded that the business decisions that brought Lehman to a crisis "may have been in error but were largely within the business judgment rule." However, the "decision not to disclose the effects of these judgments does give rise to colorable claims against the senior officers who oversaw and certified misleading financial statements," including CEO Richard Fuld and the company’s CFOs, Christopher O’Meara, Erin Callan and Ian Lowitt.

The examiner also found that there is a "colorable claim that the "sole function" of the Repo 105 transactions was "balance sheet manipulation" that "created a misleading picture of Lehman’s true financial health."

The examiner also concluded that there are "colorable claims" against the company’s auditor, Ernst & Young, on the grounds that it "did not meet professional standards" for its "failure to question and challenge improper or inadequate as disclosures."

The examiner’s report explains that the report uses the phrase a "colorable claim" to mean one for which "there is sufficient credible evidence to support a finding by a trier of fact," without presuming the finder of fact’s ultimate conclusion.

The examiner also reviewed the actions of Lehman’s lenders, JP Morgan and Citigroup. The report concludes that "The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity pool," adding that "Lehman’s available liquidity is central to the question of why Lehman failed." Citigroup, which handled currency trades for Lehman, received a new guarantee from Lehman when Lehman was already insolvent and didn’t give enough value in return, the report said. The report concludes that "a colorable claim exists to avoid the Amended Guaranty as constructively fraudulent."

The examiner also reviewed the acquisition of Lehman’s North American brokerage, concluding that "a limited amount of assets" belonging to Lehman were "improperly transferred to Barclays."

The examiner recites at the outset of the report that under the relevant bankruptcy code provisions one purpose of a bankruptcy examination is to determine the existence of "a cause of action for the estate." Given the bankruptcy examiner’s conclusion that there are colorable claims against Fuld and the other former Lehman’s officials, as well as against its outside auditor, it seems reasonable to anticipate that the next step with be the bankruptcy trustee’s initiation of claims against these individuals and the auditor.

By way of comparison, after the New Century Financial bankruptcy examiner issued a report issued a report critical of company officials and the company’s auditor (about which refer here), the bankruptcy trustee filed a lawsuit (refer here) seeking to hold New Century’s auditors liable. In addition, the claimants in the New Century securities class action lawsuit relied heavily on the Examiner's findings in their amended complaint, which later suvived a motion to dismiss. I noted at the time of the dimissal that the bankruptcy examiner's findings may have strongly influenced the court in its dismissal motion ruling.

General Growth Properties Settles Credit Crisis-Related Securities Suit: According to a February 23, 2010 filing in the Northern District of Illinois, the parties to the credit crisis-related securities suit arising out of the collapse of General Growth Properties has been settled for $15.5 million, subject to court approval. The parties’ stipulation of settlement can be found here.

The General Growth Properties suit was one of the cases first filed in late 2008 as the subprime meltdown morphed into a full blown credit crisis, as I discussed in a post at the time, here.

The lead complaint, which can be found here, was filed in January 2009. The plaintiffs alleged that General Growth’s survival depended on its ability to refinance in November 2008 approximately $1.5 billion of its $27 billion of outstanding debt. Ultimately the company was unable to refinance its debt and it filed for bankruptcy in April 2009. The plaintiffs essentially alleged that the eleven individual defendants misrepresented the company’s ability to refinance its debt.

The complaint also alleged that the company’s senior executives had improperly loaned money to certain executives so that the executives did not have to sell their company shares in a margin call. The companies also allege that the company’s officials improperly sought to have the company’s shares included in the SEC’s short selling ban, so that the officials could sell their share at inflated prices.

In a September 29, 2009 opinion (here), Northern District of Illinois Milton Shadur granted in part and denied in part the defendants’ motion to dismiss. According to the settlement stipulation, in January 2010, the parties submitted the case to mediation, from which the settlement ultimately resulted.

The General Growth suit is one of only a handful of cases filed in the wake of the subprime meltdown and the ensuing credit crisis that has reached the settlement stage, and one of only a smaller handful of cases that have been settled following a dismissal motion ruling. We undoubtedly will see more settlements ahead as more cases work their way through the system.

I have in any event added the General Growth Properties settlement to my list of subprime and credit crisis-related case resolutions, which can be accessed here. My recent status update on the subprime and credit crisis related securities litigation can be found here.

Special thanks to Adam Savett of the Securities Litigation Watch blog for providing me with a copy of the stipulation of settlement.

Hello Polly: Many readers undoubtedly saw the article in yesterday’s Wall Street Journal (here) reporting that the Bank of America has apologized after its local contractor entered the home of a mortgage borrower, while she was away, and cutoff her utilities, padlocked the door and "confiscated her pet parrot, Luke." The homeowner, separated from her parrot for a week, filed a lawsuit against the bank for emotional distress.

This momentous story was deemed by the Journal’s editors to be worthy of a front page photograph of the homeowner, now fortunately reunited with her beloved parrot.

We mention this because, as was pointed out to us by a loyal reader, the Journal’s front page above- the- fold color photograph was headlined with the phrase "Hello, I Wish to Register a Complaint." We suspect that the Journal’s editors ran the picture on the front page for the sole reason that it gave them an excuse to use that headline.

If the topic is parrots, the only possible reference is to the immortal Monty Python dead parrot sketch, which believe it or not has its own Wikipedia page, here. The skit begins with John Cleese entering a pet shop and stating (as reflected in this script of the sketch) "Hello, I wish to register a complaint." Cleese’s problem in the sketch is not that his parrot has been confiscated; rather, his problem is that the parrot he had just purchased is dead. Deceased. It is no more. It has ceased to exist. It has joined the choir celestial. This is an ex-parrot

We are delighted to have this pretext to be able to embed a video of the sketch below. Because we think everyone should know a dead parrot when they see one.

Contractor Entitled To Coverage As Additional Insured For Injury To Employee Of Subcontractor, But Insurer Still Not Obligated To Defend

Fri, 12 Mar 2010 00:15:35 GMT

In Clarendon Nat’l Ins. Co. v. American States Ins. Co., 2010 U.S. LEXIS 16091 (D. Or. Civil No. 09-548-JO, February 22, 2010), the court addressed whether a contractor qualifies as an additional insured under a policy issued to a subcontractor for injuries to the subcontractor’s employees, and if so is it entitled to defense and indemnity. Providence contracted to remodel a home and hired Woodmaster as a subcontractor. During the course of the work, one of Woodmaster’s employees, Michael Stambough, was injured. Woodmaster was the named insured under a policy issued by American States and Providence was the named insured on a policy issued by Clarendon.

American States first argued that it was protected from liability to Providence by Oregon’s workers compensation statute. The court rejected this argument because the statute does not bar additional insurance being procured that may protect a contractor based on the fault of the employer-subcontractor. The court also rejected an argument that the Oregon statute voiding construction contracts to the extent they purport to provide indemnity for another’s negligence applied. The court reasoned that in this case indemnity was allowed under the statute because American States had agreed to indemnify Providence against liability for Woodmaster’s own acts or omissions. The court used a similar rationale for rejecting an argument that coverage was excluded because no liability could be imposed on Woodmaster. The exclusion did not apply because Providence only sought to be indemnified to the extent of Woodmaster’s fault.

Even though the court found that Providence was covered under the policy, as applied to the facts of the underlying case, there was no duty to defend. The court found that because the complaint could not be read to create a possibility that Woodmaster was at fault, American States had no duty to defend Providence. The court deferred ruling on the duty to indemnify.

From Out of the Blue Comes a Proposed Exemption for Air Ambulance Companies to Avoid California Workers' Compensation Official Medical Fee Schedule

Thu, 11 Mar 2010 18:35:16 GMT

This week, the Administrative Director of the Division of Workers’ Compensation of the California Department of Industrial Relations (“DWC”) proposed a regulation, California Code of Regulations, title 8, Section 9789.70(c), that would completely exempt air ambulance companies from the Official Medical Fee Schedule (“OMFS”) that applies to all other providers who furnish medical services under the California workers’ compensation system.

The DWC’s purported impetus for this abrupt action was “to avoid the hazards and cost of litigation against the Division,” as stated in the DWC’s Initial Statement of Reasons. That Statement further advised that the DWC based its proposed regulation on the contention that the OMFS may likely be preempted by the Airline Deregulation Act of 1978, which it says “prohibits states from adopting or enforcing regulations which have any effect on airline rates of air carriers.”

This issue of preemption by the Federal Aviation Act of 1958, as amended by the Airline Deregulation Act of 1978 (“FAA/ADA”), was asserted in a lawsuit filed last year by California Shock Trauma Air Rescue (“CALSTAR”), an air ambulance company rendering services primarily in California. That action, filed in federal court in Sacramento against more than 75 workers’ compensation insurers and self-insured employers, is entitled California Shock Trauma Air Rescue v. State Compensation Insurance Fund, et al. This blog reported on that case on July 30, 2009, after the federal district court dismissed the case, finding that the federal court lacked subject matter jurisdiction over CALSTAR’s claims.

CALSTAR then appealed the action to the Ninth Circuit Court of Appeals, where the case is now fully briefed and awaiting oral argument.

Apparently not satisfied with the court's decision in its federal court action, CALSTAR threatened to sue the DWC unless it did something to offer relief to CALSTAR and other air ambulance companies. In an article posted on workcompcentral.com, the president and chief executive officer of CALSTAR stated that, after having the federal trial court dismiss his company’s action, “we went back to the DWC and said, ‘We’ve been instructed to sue you,’ is what brought this action on their part.” It is clear that the threat of a lawsuit prompted the DWC to issue the proposed regulation and completely exempt CALSTAR and other air ambulance companies from the ambit of the OMFS.

The defendants in the pending federal court action contend that the FAA/ADA does not preempt the OMFS as it applies to the medical services that air ambulance companies provide in California, and indeed exempting such companies from the scope of the OMFS on preemption ground is anathema to the legislative goals and purposes of the FAA/ADA. Larry Golub and Sandra Weishart of Barger & Wolen LLP represent a number of the defendants in the litigation.

The DWC will be holding a full-day hearing on the proposed regulation in Oakland on Tuesday, April 13, 2010, to receive statements and argument from all interested persons.

Are Florida Insurance Companies Really Losing Money? Are Investors Using Management Companies To Take Profits and Leave Little Surplus for Policyholder Claims?

Thu, 11 Mar 2010 12:59:25 GMT

An Order by the Office of Insurance Regulation shows one method some Florida insurers may use to “poor mouth” losses to the public and our legislators in Tallahassee while taking millions home through shell accounting techniques. Many of the smaller insurers operate as three corporations--the insurer, a managing general agent, and a holding company. It does not take a financial genius to figure out that investors and managers can siphon off profits by simply charging excessive fees through the managing general agent. The insurance part of the jointly owned enterprise then claims it cannot make any money for various reasons which we have been hearing about in the press and from some insurance lobbyists looking to raise rates and reduce benefits to policyholders.

Here is the important part of the Order showing the scheme:

SOUTHERN OAK has entered into an MGA agreement which the OFFICE finds
…to adversely affect the interests of policyholders by being both unfair and unreasonable. Since inception, the MGA agreement has generated approximately $35 million in profits while the insurance company has consistently generated underwriting losses. While the existing MGA agreement was initially approved based on projections of profitability of the insurance company, representations made to the OFFICE regarding the fee structure have not proven to be accurate.

…

SOUTHERN OAK shall show cause why it should not return the excessive profits in the amount of $10 million earned from the MGA agreement.

Yesterday, the insurance industry press picked up on this important story in Florida's Southern Oak Told to Correct Its Business Plan; Other Companies Are Being Examined. That story reported:

Florida's Southern Oak Insurance Co. has some explaining to do and several other of the state's property insurers may be soon to follow.

…

The OIR is reviewing annual financial statements of all companies and "is currently conducting examinations of a few companies, including the review of MGA agreements," said Brittany Benner, spokeswoman for the OIR, which "intends to conclude these examinations, taking corrective action if necessary…

Insurance companies wanting to raise rates may find a number of ingenious arguments and methods, as exemplified in State Farm's Freakoutnomics. Some reasons and concerns may be legitimate, such as the one raised by Florida Senate Banking and Insurance Chair Garrett Richter regarding the wind mitigation credits having no sound actuarial basis. Given this new revelation, many would suggest that our regulators and elected officials initiate a full investigation and require much greater financial transparency before trusting the Florida insurance industry’s arguments that rates have to go up while policyholder benefits disappear.

A Fresh Look at a New Securities Lawsuit

Thu, 11 Mar 2010 09:50:35 GMT

For those of us who spend a lot of time looking at securities class action lawsuits, the cases often have a familiar pattern. Unfortunately, the familiarity may dull sensitivity to the allegations or even to the process itself. So it was interesting to read a layman’s reaction to a recently filed lawsuit, if for no other reason than it provided a look at the lawsuit and the process with a fresh set of eyes.

The lawsuit in question was filed in the Northern District of California on March 9, 2010 against Medivation and certain of its directors and offices. As is so often is the case in these kinds of lawsuits, Medivation is a life sciences company whose developmental stage product failed to meet certain clinical trial goals. Specifically, and as reflected in the plaintiffs’ lawyers March 9 press release (here), its product did not meet primary and secondary goals in a Phase 3 clinical trial for patients with mild to moderate Alzheimer’s disease. When the company announced this news, its stock price declined and the lawsuit followed. A copy of the complaint can be found here.

This lawsuit will work its way through the system. The lawyers involved, all of whom undoubtedly are (or when they are retained to defend will be) well versed in these things, and will raise familiar arguments that may or may not succeed. All very familiar to those of us who spend all of our time immersed in these kinds of things.

An interesting perspective about this lawsuit appeared on the Blogging Stocks site (here). The author, Gary E. Sattler, has a number of reactions to the plaintiffs’ complaint, summarizing his comments with the observation that "even when given my usually cynical nature, and my usual dislike for big pharmaceutical interests, I still take issue with this potential class action lawsuit."

After summarizing the plaintiffs’ allegations, the author notes that

The plaintiff class has to cross a significant threshold of proof in order to prevail in this case. Based on my reading of the original complaint, plaintiffs fail to establish intent, fail to reveal purposeful omission of fact, and fail to establish that the actions of the defendants were the true overt cause of any artificial inflation of Medivation's stock value. Furthermore, the plaintiff's complaint seems to disregard that Medivation has had broad yet cautious support from within the Alzheimer's treatment community. Was it all wishful thinking? Perhaps it was, but that support came from many well-educated minds experienced in the field.

Sattler goes on to note that "to me, this potential class action smacks of sour grapes." He then reiterates his support for the company and for the company’s Alzheimer’s product.

Sattler seems to be reasonably objective (he states that he has no investment interest in the company). Of course, his rough and ready assessments have no direct relationship to how the lawsuit and its allegations might fare in court. But I have often found that the court of public opinion is an accurate sounding board. True, it might be argued that because of Sattler’s preexisting interest in the company and in its product he might be biased in its favor. But just the same it is interesting to look at the allegations through his eyes and see his reaction to the allegations.

When the U.S. Supreme Court first issued its opinion in Tellabs, I thought it would make little fundamental difference, because I thought that in the end and regardless of the formal standard, courts would give the green light to cases that raised a stink and would cut short the rest. Regardless of whether I am right about the Tellabs standard, I think trial courts fundamentally assess cases on a smell test, which is basically what Sattler has done in his post, albeit without specific reference to legal standards. Viewed in that light, his rough and ready assessment is interesting. And perhaps significant, at least with respect to the case’s prospects.

More About the FCPA: Regular readers know that I have a certain fixation about the Foreign Corrupt Practices Act. (Indeed, one reader has gone so far as to accuse me of being "obsessive" about it.) I continue to believe that the FCPA will be an increasingly important corporate exposure in the years ahead, if for no other reason than the relentless globalization of commerce.

For those who remain skeptical on the topic, I suggest a quick review of the March 10, 2010 post by Bruce Carton on his Securities Docket blog (here). In his post, Carton painstakingly compiles all of the recent comments by regulators corroborating that the FCPA is a top priority. He also reviews the significance of the recent Africa Sting enforcement action, as well as the implications of the Bribery Bill which may soon become law in the U.K. As Bruce’s emphasizes, there are a number of very significant implications to the Bribery Bill.

As Carton puts it, top FCPA lawyers agree that the anti-bribery activity has reached "a fever pitch." Whether or not I am obsessive, it is indisputably clear that FCPA related enforcement activity will be a significant area of corporate exposure in the months and years ahead.

A Picture is Worth a Thousand Words: Want to know what the financial crisis is all about? Check out this graphic depicting the escalating mortgage default rate during the current crisis. No interpretation required. As for myself, I am considering investing in gold. And stocking my basement with water, canned goods, matches, stout rope and a knife. You never know.

This Too Shall Pass: You are probably familiar with the OK Go video performed on an array of treadmills. If not, you should get out more. I’ve seen it and I have serious social issues. (See prior item). However, and in any event, everyone should watch the new video from OK Go for its new song, "This Too Shall Pass." Rube Goldberg would be impressed. Smashing pianos, crashing trash cans, smashing TV sets (showing the treadmill video, no less), the whole enchilada.

Though I have embedded the Rube Goldberg version below, there is an alternative spoof marching band version here that is also funny in a completely different way. (Don’t you love the Internet?) Please also see the Author's Note below.

Authors’ Note: This blog post was written in its entirety on a laptop computer while the author was sitting in Cladgagh Irish Pub in Lyndhurst, Ohio and watching Real Madrid play Lyon in a UEFA Champions League game on the television. (In an excellent game, the teams played to a 1-1 tie.) I hope you enjoy reading this post as much as I enjoyed writing it. Gradus ad Parnassum.

What is an Examination Under Oath?

Thu, 11 Mar 2010 04:28:45 GMT

What is an Examination Under Oath?

The number one trigger that drives clients to my office is that dreaded lawyer from some fancy law firm, usually with lots of names at the top of the letterhead, that directs the insured to show up at a designated time and place for an “examination under oath.” The letter usually will also request the insured to bring numerous documents with him or her to the examination under oath. Those receiving the letter are usually frightened by the formality of it all, and then that fear turns into anger because the company they've been paying premiums to all these years is not treating them like a criminal. My next few posts will deal with common issues and questions surrounding examinations under oath. Hopefully it will help a few insureds understand what an examination under oath is, and why, in my opinion, a request for an examination under oath should be a red flag that the insurance company believes something is afoul.

An examination under oath, commonly referred to as an “EUO”, is a formal statement taken by the insured on issues related to the insurance claim or insurance policy at issue. EUOs are typically, although not always, conducted by an attorney representing the insurance company. A court reporter will be present, typing every question and answer verbatim. There is sometimes a videographer present as well. Examinations under oath usually last only a few hours, but I’ve been involved in a few that have taken multiple days.

The subject matter of the questions in an EUO varies depending on the issues at hand. For example, in a fire damage case, an insured should anticipate questions about the cause and origin of the fire, the financial condition of the insured leading up to the fire (motive), the insured’s whereabouts at the time of the fire (opportunity), the nature and extent of the loss, particular items claimed to have been damaged or destroyed, and the accuracy of answers provided in the insurance application. This is just a small sampling of the multitude of pitfalls for the unwary, and an insured would be wise to seek qualified legal counsel well before appearing for the examination under oath.

An insurance company’s authority to take an examination under oath comes from the insurance contract, which typically contains a provision, under the section “Duties of the Insured,” that the insured must answer questions under oath when requested by the insurer. Even without such a provision, there is almost always a “duty of cooperation” provision in the policy which would also require the insured’s participation in an examination under oath. If an insured refuses, it could result in the insurance company’s denial of the claim based on its assertion that the insured breached the insurance policy by refusing to cooperate. See Spears v. Tenn. Farmers Mut. Ins. Co., 300 S.W.3d 671 (Tenn. Ct. App. 2009).

Tennessee courts have consistently recognized an insurer’s right to take an examination under oath. See Shelter Ins. Co. v. Spence, 656 S.W.2d 36 (Tenn. Ct. App. 1983) (holding insurer was entitled under cooperation clause of policy to take sworn statement from each insured privately and out of each other’s presence); Widener v. Tenn. Farmers Mut. Ins. Co., 1995 WL 571868 (Tenn. Ct. App. 1995) (recognizing an insurer’s right to take an insured’s examination under oath); Jones v. Tenn. Farmers Mutl. Ins. Co., 2004 WL 170359, at *2 (Tenn. Ct. App. 2004).

Examinations under oath are certainly valid tools in an insurance company’s vast arsenal of weaponry to be used to deny claims, but there are several nuances which most insureds and many lawyers who represent them are unaware. Over the next few posts, I’ll try to identify those to better equip those unfortunate souls who receive the dreaded letter requesting an EUO.

NY Power of Attorney Form - Bar Association discussion of interest

ccurrin@currinlawoffice.com (Callie Currin) — Wed, 10 Mar 2010 21:44:41 GMT

In the March/April 2010 edition of the NY State Bar News, NY's new Power of Attorney form is discussed as it was the topic of the Trusts And Estates Law Section Annual Meeting.

The new form went into effect on September 1, 2009 and according to Brandon J. Vogel, author of the State Bar News article "what once was a straightforward legal tool became a well-intentioned, but overcomplicated form at the expense of the general public." While a discussion of the details of the new law are well-beyond the scope of this posting and insurance compliance generally, one aspect that is particularly important to note is that third parties, such as financial institutions, now must accept a validly executed form.

No longer will insurers be permitted to require the use of their own form. While I have received some questions on whether language on application forms triggers the requirements of the new law, the import is actually the opposite. Insurer's in house forms cannot substitute for the 9-page, 12-point type form with mandatory notices. Both principal and agent must sign and be notarized.

It is also important for insurer's to note that the new form has an automatic revocation feature when a new form is executed. If an insurer's customer executes a new PoA under the law, any previously executed form is automatically revoked, including any form on file with the insurer. Panelists at the Bar Association meeting recommend a revision to the law to reduce the possibility of inadvertent revocations, but as of now that provision stands.

Also discussed in the Bar News was the possibility that the complexity of the new PoA forms could lead to more guardianship proceedings, which could have impact for insurers as well, due to the complexity of the form and the reluctance of some to wade through the 9 pages. Of course, without a guardian or a properly executed new form PoA, dealings must be with the principal.

Down and Dirty with Neutral Evaluation of Sinkhole Claims

Wed, 10 Mar 2010 20:42:27 GMT

(Note: This Guest Blog is by Kristin Demers-Crowell, an attorney with Merlin Law Group in the Tampa, Florida, office. This is part of a series that she and fellow attorneys Donna DeVaney and Amy Boggs are writing on sinkhole issues).

Two weeks ago I wrote on the three ring circus that Florida’s statutory neutral evaluation of sinkhole claims has become. Fla. Stat. 627.7074. This follow up blog focuses on the “down and dirty” reasons why the process is unfair to policyholders.

It is evident why neutral evaluation might have been appealing to lawmakers. It is designed to be an alternative dispute resolution procedure to encourage settlement of sinkhole insurance claims—on its face, a good thing for insureds. However, problems have arisen in the application of the law. Here are a few:

Dirty Problem Number One: How to get a truly “neutral” evaluator

The statute requires the “neutral evaluator” to be a professional engineer or professional geologist who has completed a course of study in alternative dispute resolution designed or approved by the Department of Financial Services (“DFS”) for use in the neutral evaluation process, who is determined to be fair and impartial. The statute does not provide a procedure by which a neutral evaluator is determined to be fair and impartial. However, the DFS Neutral Evaluator Application asks if the candidate, or a business entity with which the candidate is affiliated, receives more than 90% of its gross income or revenue in the past calendar year from either property insurers or from property insurance claimants. Thus, so long as the candidate’s income from insurance companies or policyholders in the last year is only 90% or less, it appears they are determined to be fair and impartial. The vast majority of neutral evaluators on the DFS list are known insurance company expert witnesses, with a couple known to have served as property owner experts. Either way, it must be extremely difficult to be neutral when you have performed studies for your own clients in the very neighborhood where the neutral evaluation is pending.

Dirty Problem Number Two: How to ensure evidentiary protections when the Neutral Evaluator’s Written Recommendation is automatically admissible

According to the statute, neutral evaluation is “an informal process in which the formal rules of evidence and procedure need not be observed.” In spite of this, the neutral evaluator’s written recommendation “is admissible in any subsequent action or proceeding relating to the claim or cause of action giving rise to the claim.” This circumvents a number of Rules of Evidence, which are designed to protect all parties to a dispute and prevent the trier-of-fact (a jury or judge) from deciding cases on an improper basis.

For example, the Florida Evidence Code sets forth a number of tests regarding the qualifications of experts and the basis of expert opinions before they can be presented to a jury. Fla. Stat. 90.702, 90.704, 90.705. These are meant to ensure that witnesses have sufficient knowledge, skill, experience, training or education before they are presented to a jury as “experts,” and that the basis of their opinions is scientifically reliable. It is unclear how these rules will “jive” with the neutral evaluation statute which appears to automatically admit the evaluator’s written expert opinion into evidence without meeting these criteria. And this is just the tip of the iceberg. There are also problems with the unfair prejudice rule (Fla. Stat. 90.403), hearsay (Fla. Stat. 90.801) and substantive due process under the Florida Constitution.

Dirty Problem Number Three: How to keep insurance companies from wrongfully denying coverage for sinkhole claims

If a neutral evaluator opines there is no sinkhole, and a policyholder declines to drop the claim, the statute excuses an insurance company from liability for extracontractual damages. Does this mean there can be no bad faith liability even if a jury finds an insurer wrongfully denied coverage for a sinkhole claim? How does this square with Florida’s Unfair Claims Practice Statute Section 624.155?

Recently, regarding a burden of proof issue with the new sinkhole statute, Florida’s Second District Court of Appeal stated:

“We recognize the legislature’s desire to stem the tide of sinkhole-related insurance claims. . . . But we are hesitant to conclude that this . . . extends to the micromanagement of trial proceedings between private parties.

Warfel v. Universal Ins. Co. of N. Am., No. 2D08-3134, 34 Fla. L. Weekly D 2527, 2009 Fla. App. LEXIS 19070 (Fla. 2d DCA December 9, 2009) at *11-12, n. 7.

We shall see if the appellate courts feel similarly with regard to whether Florida’s sinkhole neutral evaluation statute is on solid ground.

Wake Up and Smell the Threats: Two Recent Examples of Why Municipalities Need Cyber Insurance

ppengelley@cozen.com (Pamela Pengelley) — Wed, 10 Mar 2010 16:56:53 GMT

Odd as it may seem to those of us who live and breathe cyber, tech and privacy insurance, I have heard anecdotally of municipal authorities who profess that their cities and towns do not need to incur the expense of buying cyber insurance. “Why do we need it? We don’t operate on the internet,” they [...]

Well, my response is “why don’t you think you need it?” Do you maintain a bank account? Do you store personally identifiable information about private citizens, whether in your property records, police files, tax databases or otherwise? Are your employees able to access your municipality’s computer systems remotely? Is it really possible that every single piece of information you maintain is recorded on paper and nothing is stored on a mainframe, whether located on- or off-site? Come on. Its 2010. That’s virtually impossible, isn’t it? Haven’t you read my December 23, 2009 post “No One is Immune. Even Government Entities Need Cyber/Tech Insurance.” Since that posting, additional municipalities have suffered cyber attacks and been the subject cyber lawsuits.

Most recently, hackers broke into a bank database and stole $378,000 in funds from the Town of Poughkeepsie, New York. Shortly thereafter, leaders of the neighboring City of Poughkeepsie, New York (same name, but this one’s a City) authorized the purchase of cyber insurance with a minimum policy limit of $500,000. According to the City’s mayor, it will be one of the first municipalities in its area (the Hudson Valley, north of New York City) to purchase such insurance. (I guess that officials in the other local towns and cities and their brokers don’t read this blog. Shame on them). Needless to say, if I was a broker or underwriter, I’d descend on the region and market the need for cyber insurance till I dropped. To their credit, officials in the City of Poughkeepsie also announced that they were increasing the limits on their employee theft (fidelity) insurance from $25,000 to $100,000 per occurrence and their separate theft coverage from $100,000 to $500,000 per occurrence for certain City officers, at an added cost of a reasonable $10,000 premium Smart, prudent and forward thinking. (Now, about that name).

While this was going on, my own local municipality, Lower Merion Township, Pennsylvania, was involved in its own brouhaha. If you haven’t heard (and, to be honest, who hasn’t heard), the Lower Merion School District provides all of its approximately 2300 high school students with an Apple laptop. (No wonder my taxes are so high). What school officials didn’t do was notify students and parents that the laptops had built-in cameras which school officials could turn on and off without warning. While officials say this system was used only approximately 43 times, and only when the computers were reportedly lost or stolen, the use of the system on one occasion has lead to the filing a federal court class action lawsuit, purportedly brought on behalf of all Lower Merion high school students. Many local students and parents with whom I have spoken are not necessarily in favor of this lawsuit (I’ve heard comments like: “all I’m doing is paying lawyers… at the expense of increased taxes…” and “I’ll be taking money out of one pocket and putting it into the other…” and “the school district didn’t mean any harm; they were just protecting their property…”); nonetheless, it has caused the Township to hire Big Firm lawyers to investigate the situation and deal with the fallout. To the point, even if the School District didn’t do anything wrong, or simply made a mistake, the attorneys’ fees alone likely will run into the six figures. (My tax dollars at work). Would cyber insurance cover such an incident? Perhaps, depending on the facts and the coverages purchased. It certainly wouldn’t hurt.

In short, these latest incidents further highlight the need for underwriters and brokers to get out there and market cyber/tech/privacy insurance products to municipalities and other public institutions. How could the City of Poughkeepsie be one of the few communities in the Mohawk Valley to purchase such insurance? The Valley is an hour or so outside of New York City, as close to the insurance capital of the U.S. as one can be. And its communities are un- or underinsured? Seriously? Needless to say, there must be similar pockets of Americana which are similarly uninsured. In this age of computer crime and the ease with which insurance professionals can communicate with distant clients, it shouldn’t be difficult to get the word and the products out. In other words, let’s all get to work.

The Myth of the "Hands Off" Prototype Plan

Wed, 10 Mar 2010 14:00:17 GMT

True or false? If you adopted a 401(k) plan offered by a U.S. prototype vendor, you can leave compliance entirely up to the vendor. You may be surprised to know that the answer is “false”. An easy way to quickly adopt a U.S. tax-qualified savings plan, “prototype 401(k)...

An Interesting Day in Tallahassee and Thoughts on the Pending Replacement Cost Coverage Legislation

Wed, 10 Mar 2010 13:49:10 GMT

The Florida legislature is a difficult place to navigate. The place is an adult maze, and it takes effort to find the right room. Possibly, the logistics are a warning to novice citizens such as me that actually try to have some small input regarding the laws we agree to abide.

In Senators Mike Fasano and Rhonda Storms Come to the Rescue of Policyholders, I commented on the Florida Senate proposal that would repeal prompt payment of replacement cost benefits. I was asked if I could participate yesterday in a “workshop” of sorts where Senator Rhonda Storms asked lobbyists from the insurance industry and then some consumer advocates to explain some of the issues underlying the proposed legislation.

People may underestimate the intelligence of Rhonda Storms. She is a lawyer by training and can easily get to the critical issues of a complex problem. Until I spent time discussing insurance related matters with her last year, I was not aware of how bright she truly is. Rhonda Storms is a colorful person and enjoys quips that the media love. I honestly believe her outlandish comments come from boredom during a debate--wasting time by not going to the heart of the matter. She is a bottom line person that expects honesty and candor. Senator Storms takes her job seriously and works hard for the people.

The insurance industry representatives use the word “fraud” to seemingly justify everything they propose. They said it with visceral passion yesterday. If you were from Mars and did not know better, you would think insurance is the most defective product ever made because it makes otherwise honest people into crooks. I hope our representatives can see through this sham and appreciate that their constituents don’t become criminals or morally corrupt as a result of an insurance claim. It almost smacks of McCarthyism applied in an insurance sense.

Being an attorney and having to zealously advocate for clients, I can appreciate that the insurance lobbyists have a job to do and are under pressure. They are successful if they can convince our representatives of the insurance company’s version of reality and persuade those representatives to pass laws favorable to them. That is fair and that is the American way.

"At War With The Weather" is a Must Read for Those Involved in the Debate of the Florida Property Insurance Market. Listening to those insurance lobbyists yesterday, I wondered how many read the book or have studied the Replacement Cost Coverage claim issues. I wondered if they cared why the laws were enacted, thought about the issue from their client’s customers points of view, or whether they even cared because all that matters is pleasing their client on the outcome of the legislation. And, I can appreciate the last concern because when you are retained by a client, “winning” is why you get hired.

After the meeting was over and Senator Storms thanked everyone for educating her, I stopped this amateur endeavor and worked on cases for clients that probably have no idea I was calling from Tallahassee. This concept is important. There are no professional lobbyists for policyholders in Tallahassee. As I pointed out in Sean Shaw is a Refreshing and Intelligent Advocate for Floridians--We Deserve This Type of Representation, Sean Shaw is as close as it gets to a policyholder lobbyist. I also made a “gallows joke” with some others that if the law were repealed, I would personally profit more because there would be more litigation over various and commonly disputed issues, as there was before these Replacement Cost Laws were passed. Only my potential future clients could care about this issue, and there would be far fewer of them if the laws stay the same—I started wondering if it was all worth the effort.

Nevertheless, I have to work on active cases and cannot afford the time to go back and debate the replacement cost benefit issues today in Tallahassee. If I were there, these are some of the points I would try to have our Senators consider. My opinions are not based on speculation, but on my experience in litigating residential claims before these laws passed.

SB 2044 removes the prompt payment of full benefits and places additional requirements on residential policyholders that would repeal all the work done by this Legislature following the windstorms of 2004 and 2005 and end 70 years of common law protections for policyholders suffering partial damage to their homes.

History: The Florida Legislature passed Replacement Cost Laws that require insurers to pay replacement cost benefits to policyholder who purchased “replacement cost insurance.” These laws resulted from claims delays and disputes that were inherent when insurers withheld prompt and full payment of replacement cost benefits. Many policyholders were outraged that many insurance companies sold a “replacement cost policy” only to find that the full “replacement cost benefits” for their real and personal property were withheld. Prior to that time and through the present, Florida common law required that insurers pay for “repairs” to structures suffering partial damage on an actual cash value basis without depreciation taken. Glens Falls Ins. Co. v. Gulf Breeze Cottages, 38 So.2d 828 (Fla. 1949).

SB2044 proposes that policyholders who pay a significant additional premium for replacement value coverage (RCV) and who incur a loss to their home or personal property, then have to accept payment other than on a “replacement cost basis.” The proposed laws allow an insurance company to pay smaller, actual cash value (ACV) benefits and “hold back” any other funds until, (a) on the dwelling, after a contract is signed to replace or repair the home; and, (b) on personal property, until the homeowner provides receipts for the personal property (i.e. pay for replacement and prove the amount of the same with receipts).

• Policyholders are paying premiums for RCV coverage and therefore, should not be limited to ACV or anything other than what is being advertised or suggested as being purchased. Laws should not be made which reinforce that purchasing RCV means getting something else other than full and prompt RCV, as a matter of law.

• Insurance companies have no legitimate basis to withhold policyholder RCV claim amounts when selling RCV policies. However, they will wrongfully profit from such legislation allowing for the same because (1) they get to play the float during the period that they hold onto the RCV money without paying the interest from such withholding to the policyholder (2) policyholders that fail to replace for one reason or another will never obtain the money. Such uncollected RC benefits do not go to help the neighborhood, community, or anybody other than the insurance companies which, through this law, keep money otherwise owed to their customers who paid additional premiums for those benefits. While the insurance industry argues there is a public policy behind their attempt to change the law by influencing people to rebuild, repair and replace, they fail to highlight the obvious—insurance companies make more money by playing the float with the policyholders cash and may make windfall profits the same way a retailer does when the gift card goes uncollected.

• The purported reason that this legislation is needed is to prevent fraud is, therefore, a myth. Prior to 2006, a number of insurance companies honestly advertised “replacement cost coverage,” which actually paid policyholders “replacement benefits” as the current law requires. The current claim that some insurers make that this bill will prevent fraud is disproven by these other companies selling the coverage in Florida before the 2006 Laws. And, those same companies offer it in other states today, without claiming that such prompt replacement benefits result in fraud by their customers.

• Significant delay of payment to policyholders to repair structures is already occurring and does not need to be encouraged. Most mortgages require dual signatures on any insurance check – one from the homeowner and the other from the mortgage company. The mortgage company then has the right to inspect and approve of the progress and repairs to a dwelling before releasing payment of the insurance benefits. Checks and balances are in place for repair. There is no real need to further burden policyholders and delay repair during an already emotionally and financially traumatic time. Policyholders do not need the additional hassle of the insurer arguing how the repair or replacement should be made simply because the insurance adjuster does not like how the construction contract calls for repair or replacement.

• Homeowners who pay a premium for RCV coverage and who sustain a loss, should be able to use the funds as they see fit – it is their money. Whether it is used for nicer tile or wood floors in the home, or to put nicer fixtures in the home, or to remodel the structure in a manner acceptable to the mortgage company and the homeowner but not as it was, it is the homeowner’s money-subject to mortgage requirements-and the homeowner should be able to spend as they think is best for them.

• Litigation, claims disputes, and claims delays have been reduced because insurance company adjusters are not subject to first estimating RCV, holding back an arbitrary depreciation figure which the policyholder may dispute, and then determining when the held back RCV payments are due as the insurance company adjuster inspects the construction contract and the hundreds, if not thousands, of receipts. Simple and prompt claims payment standards, as the current law requires, should be encouraged.

• Any insurer may repair or replace a damaged structure at its own cost without payment of monetary benefits pursuant to the Florida Valued Policy Law and standard insurance policies. These provisions take whatever possible profit incentive that may exist for the policyholder out of the transaction and were written for the insurer’s benefit. Thus, in addition to what has been pointed out previously, there is a fallacy that insurers are looking for a change in the laws to require repair to benefit society or that they cannot require replacement of damaged structures. Insurers currently have the legal right to do so, but they do enforce this legal right because they want the risk and uncertainty of the rebuilding costs and complications of dealing with a construction that goes awry to remain with the policyholders.

• Many policyholders cannot fully replace or repair because they cannot afford the additional and increased cost to upgrade to the new building ordinances which are not paid for under RCV. Thus, many insurers will obtain windfall profits, often at the expense of the less affluent or fixed income policyholder that cannot afford Code Upgrade Coverage. Code Upgrade Coverage is an additional cost above RCV. Many policyholders do not have this coverage or enough of it.

• Many policyholders cannot fully replace or repair because they cannot afford the additional costs of perils limited or excluded under the policy. Thus, insurers obtain windfall profits because of other policy language they can use to prevent the complete repair or replacement from occurring. Many insurance companies limit the amounts paid for damaged items such as debris removal, the increased costs to remove mold following a water loss, asbestos removal and other perils, while excluding portions of damage in their entirety, such a wind driven rain and other certain water losses. Policyholders may not have enough money to pay for the entire cost of repairing a structure as a result of the limitations and exclusions under the policy and never receive RCV benefits that they paid for. Indeed, they cannot even use the RCV benefits to help make up for the limited or excluded items of a claim.

And, for those that read last night’s post, Representative Janet Long Gets a Hug From Chip Merlin, I will follow up on that story at a later date.

Severe Fog Contributes to Sheboygan County Truck Crash

Wed, 10 Mar 2010 12:01:55 GMT

Severe fog has contributed to a Sheboygan semi-truck crash that resulted in at least 2 injuries. The crash occurred about 8:00 a.m. on March 9, 2010, at Sheboygan Highway County PP and Prairie Road.

The crash occurred when one semi-truck, driven by Justin Simon, 27, of Fond du Lac, Wisconsin, and owned by Dierks Waukesha, a Wisconsin food distributor, was stopped on County PP, waiting for traffic to clear before negotiating a left-hand turn. A jeep driven by Timothy Christensen, 45, of Plymouth, Wisconsin, was stopped behind the Dierks Waukesha semi-truck. At that time, another semi-truck, driven by Steven Guelig, 51, of Cascade, Wisconsin, and owned by owned by Schwind Trucking, LLC, out of Glenbeulah, Wisconsin, approached the vehicles from behind and was unable to stop his semi-truck in time, colliding with the jeep, essentially sandwiching it between the two semi-trucks.

The crash also resulted in the severing of both tractor-trailer’s diesel lines, spilling fuel all over the scene, including fuel being spilled near an electrical transformer. The semi-truck crash resulted in the following entities being called to the scene:

Sheboygan County Hazmat Team
Wisconsin Department of Natural Resources
Sheboygan County Sheriff's Department
Wisconsin State Patrol
Plymouth Police Department
City of Plymouth Fire Department
Town of Plymouth Fire Department
Plymouth Ambulance
Jaws of Life Unit – Plymouth

Preliminary investigations have determined that the Schwind Trucking semi-truck operated by Guelig, was operating too fast for the poor weather conditions. Federal law requires truck drivers to use extreme caution in dangerous weather conditions, including fog.

According to the Federal Government, Schwind Trucking owns 10 tractor trailers and employs 10 drivers. Schwind Trucking drivers have received at least 5 moving violations and have been involved in at least one prior state-reported crash within the last 30 months.

A search has revealed that Schwind Trucking is insured up to $1,000,000 by Employers Mutual Casualty Co.

A Status Update on the Subprime and Credit Crisis-Related Litigation Wave

Wed, 10 Mar 2010 10:13:10 GMT

It has now been over three years since the first subprime-related securities class action lawsuit was filed in February 2007, yet many of the cases filed in the ensuing litigation wave are still only in their earliest stages. While the vast majority of these cases are still unfolding, there have been some important recent developments, suggesting that the evolving litigation wave has passed some significant milestones. With that possibility in mind, it seems appropriate to check in for a status report on the subprime and credit crisis-related litigation wave.

In the latest issue of InSights (here), I take a look at the developments to date as the subprime and credit crisis-related cases have worked their way through the system, including trends in motion to dismiss rulings and settlements, as well as with respect to issues such as gatekeeper liability and defense expense costs.

Restatements Decline - Again

Wed, 10 Mar 2010 10:10:36 GMT

Both the number of restatements and the number of companies reporting restatements are declining according to a new study. The number of restatements has been declining for three years now, and the number has declined materially since the figures peaked in 2006, both because of better controls and changing standards.

The study, by Audit Analytics, is not yet available online, but it has been widely reviewed, including in a March 4, 2010 CFO.com article (here) and a March 1, 2010 article by Matt Kelly of Compliance Week (here).

As reflected in this article, the study shows that there were just 630 companies reporting 674 accounting restatements in 2009. There were 24% fewer restatements in 2009 compared to the prior year, when there were 923. The 2009 figures represent the lowest number of restatements since 2001 (when accounting scandals dominated the headlines).

The number of restatements has actually declined for three years in a row since they reached their peak in 2006, when 1,564 companies filed 1,796 restatements. In other works, the number of restatements in 2009 was 62 percent less than the number in 2006.

In addition to the declining number of restatements, accounting errors requiring a restatement are now being caught sooner. The average restatement in 2009 covers a period of 476 days, compared to 716 days in 2006.

Restatements also reduced earnings by smaller amounts. 2009 restatements on average reduced earnings by $4.6 million, compared to $7.2 million in 2008 and $23.5 million in 2006.

The CFO.com article reports that the study’s authors attribute the decline to two factors: improved internal controls as a result of Section 404 of the Sarbanes Oxley Act, and a 2008 recommendation by the SEC’s Advisory Committee on Improvements to Financial Reporting that the SEC “relax its requirements on what types of errors should trigger restatements.”

One circumstance supporting the suggestion that SOX may be contributing to the reduced number of restatements is the fact that the majority of U.S.-based companies issuing 2009 restatements (374 out of 522) were “nonaccelerated filers,” meaning that Section 404’s requirements do not yet apply to them. Of course, there are, in fact, more nonaccelerated filers than accelerated filers in the first place, so the raw numbers alone may not tell the whole story. In addition, the smaller nonaccelerated filers simply may be more likely to have problems due to their small staffs and fewer tools.

On his Compliance Week blog, Kelly points out that the number of restatements by accelerated filers grew between 2002 and 2005, the year they had to comply with Section 404, but they have declined since that time. Kelly concludes that, despite all of the criticism of the provision, Section 404 may be working.

To those who say we had a crisis in 2008 notwithstanding Section 404, Kelly points out that the most recent crisis “has largely been a crisis of flawed assumptions and reckless risk management coming home to roost – not accounting fraud.” Kelly concludes that whatever financial reform Congress might conjure up in response to the current crisis, it is not time to “start rewriting Sarbanes-Oxley wholesale,” as “the law is working just fine.”

The suggestion that the declining number of restatements is due to SOX reforms brings to mind the long-standing question whether the changes in the number of securities class action filings are also attributable to improved company behavior as a result of SOX.

However, though the number of restatements has declined steadily, the number of lawsuits has fluctuated from year to year. Indeed, the most recent year with the highest numbers of restatements, 2006, when there were almost three times as many restatements as in 2009, there were fewer class action lawsuit filings (116) than in any year since 1996, and certainly significantly fewer filings than in 2009, when there were (depending on whose count you are using) at least 178 filings.

So there may well be fewer restatements as a result of Sarbanes Oxley, but that alone does not explain what has been happening with fluctuating securities class action lawsuit filings. Changed corporate behavior as a result of Sarbanes Oxley, even if it has occurred, is not a sufficient explanation for lawsuit filing levels. There may simply be too many other areas of corporate activity, beyond those addressed in Sarbanes Oxley, that continue to attract the unwanted attention of the plaintiff’ class action securities lawsuits.

The bottom line seems to be that as good as the news is that the number of restatements is declining, that does not necessarily mean as a general matter that companies are necessarily less likely to be sued.

Representative Janet Long Gets a Hug From Chip Merlin

Wed, 10 Mar 2010 03:29:26 GMT

"You gotta be kidding me" is probably being repeated by many after reading the title to this post. I wrongfully wrote about Representative Janet Long without giving her an opportunity to explain her concerns and longstanding advocacy for policyholders when she worked as a Deputy Insurance Commissioner in a Florida Department of Insurance Branch office. Before the spotlight of politics and public life subjected her to criticism without an ability to fully explain the purpose of the laws she proposes, her job in the Florida Department of Insurance required her to talk with and help policyholders upset about every imaginable wrong that could possibly befall an insurance consumer. I should have been more diligent in my research of her before jumping to conclusions about the framework for her views in this very public blog.

In Flood Insurance Waivers Concerning Proof of Loss are Subject to Judicial Review: A Recent Flood Case that Makes Sense, I made the following statement:

We all make mistakes and sometimes act arbitrary or capriciously—it is human nature. It is also human to not want to admit our wrongs.

If anybody handled as many consumer complaints and battled insurance company decisions as Representative Janet Long did in her position with the Department of Insurance and then had some ignorant attorney (me) write about her being against insurance consumer interests, they would rightfully be upset and deserve an apology. And, I apologize.

This is not the end of the story between Representative Long and myself. Our meeting was longer than I expected-and we did hug at the end. There will be more in the morning's post about pending insurance legislation and my interesting day in Tallahassee.

Court Finds That an Agent's Bad Manners and Technical Violations of Procedures and Rules Does Not Establish Bad Faith

Tue, 09 Mar 2010 23:56:17 GMT

Allstate Indemnity Co. v. Shoopman
Docket No. 09-cv-0083
(E.D. Ky. February 11, 2010)

In this case, the Shoopmans’ home was substantially damaged by fire. After they filed a claim, Allstate investigated the causes of the fire and suspected the fire was the result of arson and that an “insured person” was involved in the arson and/or concealed or misrepresented material facts relating to the loss. Allstate filed an action, asking the Court to declare that the Shoopmans are not entitled to coverage under their homeowners policy. The Shoopmans filed a counterclaim, alleging violations of the Unfair Claims Settlement Practices Act (“UCSPA”) and the Kentucky Consumer Protection Act (“KCPA”), for bad faith in handling their claim. At issue in this opinion was Allstate’s motion for summary judgment.

Regarding the ”insured person” issue, the policy precludes coverage if “any insured person” under the parties' insurance policy engaged in or directed an intentional or criminal act in setting the fire or concealed or misrepresented any material fact or circumstance to Allstate during the claim investigation. Allstate argued that the Shoopmans’ son, Michael, resided in their home at the time of the fire and is an “insured person” as a matter of law. The Shoopmans argued that Michael was staying in the house temporarily to recover from injuries from a motorcycle accident, so he is not an “insured person” under the Policy. The Court concluded that the evidence supports more than one reasonable inference, so summary judgment was not appropriate on that issue.

Allstate also alleged that Michael misrepresented facts and concealed pertinent information about his father's mandolin, his criminal background and his activities on the day of the fire which were “material” to the investigation. As the jury could find Michael was not an “insured person,” the Court declined to consider that argument.

Allstate also argued that the Shoopmans included a Gibson mandolin on the Proof of Loss but did not tell Allstate that the mandolin had been pawned and did not notify Allstate that the mandolin had been recovered until months later. The Shoopmans argued that Michael pawned the mandolin and they did not know of it until after Michael was arrested, well after they filed the Proof of Loss. The Shoopmans further contended that any alleged “misstatements” on the Proof of Loss related to the mandolin did not affect Allstate's investigation. The Court held that whether the Shoopmans actually misrepresented or concealed information, and whether that information was material to the investigation, are questions for a jury and denied summary judgment.

As for the Shoopmans’ bad faith claim, the Court granted summary judgment in favor of Allstate. The Shoopmans argued that Allstate’s predisposition to blame Michael for setting the fire, failure to comply with its corporate adjusting requirements, and rude behavior towards them constituted more than “mere negligence” and were deliberate acts and reckless disregard for their rights as insured persons. The Court disagreed. “The Shoopmans' assertions simply do not amount to outrageous conduct absent some affirmative act of harassment or deception.” The Court held that to prove a bad faith claim regarding a delay in claims handling, there must be proof or a reasonable inference that that the purpose of the delay was to extort a more favorable settlement or to deceive the insured regarding coverage. Allstate’s adjuster’s and investigator’s bad manners or errors in judgment were not sufficient to support a bad faith claim, nor were its technical violations of its procedures and rules.

Read the full opinion here.

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