INSIDE THIS ISSUE
Support Your Local Arsonist Or The Tilted Playing Field In New York
Has The Flood Exclusion Been Washed Away
Innocent Co-Insureds
Follow The Fortunes - But Not For Ex Gratia Payments
Jury Selection In Insurance Fraud Trials
INSERT - - A Less Known Right
[In this piece we depart from our usual practice of reporting specific recent developments to present an in-depth analysis of a legal subject of great concern to the industry, the arson defense. The author of this op/ed article is one of our elder statesmen in the field of property insurance, Eugene A. Leiman.]
SUPPORT YOUR LOCAL ARSONIST or THE TILTED PLAYING FIELD IN NEW YORK
The topic is the current New York rule that requires an insurer, in defending an action on a policy of fire insurance on the ground of arson, to establish that defense by "clear and convincing evidence." The inquiry is whether that rule justifies the title of this article.
In 1881 the Appellate Division, Fourth Department, held that, where arson by an insured was asserted as a defense in an action on a policy of fire insurance, the insurer could establish that defense merely by a "preponderance of the evidence." (Johnson v. Agricultural Ins. Co.)1 A few years later, the Court of Appeals, while noting that the Johnson decision had been the subject of "considerable controversy among authors upon evidence," nevertheless refused "to express any opinion" on it.2 Moreover, in a series of later cases, the Court of Appeals affirmed Johnson's basic principle, holding that where a party to a civil action is "charged, incidentally, with arson, embezzlement or any other crime," the adversary "is only required to sustain his case by a preponderance of evidence."3
The rule respecting the arson defense remained undisturbed in New York for decades, and in 1982 it was reaffirmed in two federal court decisions, one by implication4 and the other expressly, in an opinion that equated the holding in Johnson with the overwhelming weight of authority in the United States.5
The following year, however, 102 years after Johnson, The Appellate Division, Second Department, chose to rule for the first time that it was no longer sufficient to establish the arson defense by a "preponderance of the evidence" and that what was required was "clear and convincing evidence," a higher and "more contemporary" measure of persuasion, applicable to fraud cases, since "arson was but one form of fraud." Hutt v. Lumbermens Mut. Ins. Co.6 Reversing a judgment in favor of the defendant, the court ordered a new trial at which the "clear and convincing evidence" standard was to be charged.7
Hutt became the seminal case on the subject in New York: it was followed, without discussion, by decisions in the Second Department,8 stated by the Second Circuit to represent the established law in New York,9 and formalized as such by the New York Pattern Jury Instructions.10
Nevertheless, since the "clear and convincing evidence" standard in arson cases has not been adopted -- or even passed upon -- by the Court of Appeals, reexamination of its validity and of the Hutt decision, which brought it to New York, is warranted.
Many substantial reasons compel the conclusion that the "clear and convincing" standard applied to the arson defense should be abandoned, not only because it is intrinsically wrong but also because it is the product of the multi-flawed decisions in Hutt and its progeny.
Initially, doubt that a rule that applies the "clear and convincing evidence" standard to the arson defense constitutes good law can reasonably be inferred from the fact that it is -- and always has been -- contrary to the overwhelming weight of authority in this country. Thus, of the forty states that have ruled on the subject, New York is only one of four that has ever adopted it.11 All the others, decided before, contemporaneously with, and after Hutt, have required only "the preponderance of the evidence."12 Glossing over this enormous disparity, the Hutt court rather disingenuously referred to the out-of-state cases as "divided."13
Its minority position aside,14 New York's current "clear and convincing evidence" standard is indefensible for several additional reasons.
In an effort to overcome or minimize the effect of the overwhelming weight of contrary authority, the Hutt court sought to justify the "clear and convincing evidence" standard on the ground that it represented a "more contemporary measure of persuasion." This was a clear misreading of legal history as well as an unwarranted reliance on inapposite cases.
In the first place, a leading text on evidence reports examples of the "clear and convincing" standard being applied in various kinds of cases as early as 1749,15 which is certainly not contemporary." Moreover, the pages of leading insurance treatises are literally studded with citations, contemporaneous with Hutt, that overwhelmingly support the "preponderance of the evidence" standard as the accepted "measure of persuasion."16
Even more serious is the fact that what the court in Hutt did, erroneously, was take the standard of proof applicable in cases where a plaintiff seeks to establish common-law fraud by a defendant and transfer that standard to cases where, in an action for breach of an insurance contract seeking money damages, the defendant asserts arson as an affirmative defense to its obligation under the contract to make payment. None of the cases cited by the court in Hutt justifies such a transfer of the standard of proof. The flaw in Hutt is well explained by the decision in Mutual of Enumclaw Ins. Co. v. McBride, 295 Or. 398, 667 P. 2d (1982), where the Oregon Supreme Court considered this precise question and rejected the clear and convincing standard as the insurer's burden of proof in establishing its affirmative defenses of arson and fraud. That court found that clear and convincing proof of fraud is required in common law fraud actions because the stigma of fraud is not lightly laid upon a defendant and thus the stakes are more substantial than the mere loss of money. However, with respect to an affirmative defense of fraud in an action on an insurance contract, the court found:
The fraud, if any, is on the insurer, a private party, not on the court or the public. The stakes are solely financial and aim at compensation rather than punishment. While the loss of anticipated insurance benefits may be a severe blow, it is no more severe than the consequences attaching to many disputes in tort or contract. For these reasons, insurance fraud or false swearing is a purely civil dispute. Accordingly, the jury was properly instructed that the measure of proof in this case was by a preponderance of the evidence.
This reasoning was cited with approval in Horrell v. Utah Farm Bureau Insurance Company, 909 P. 2d 1279, 1281 (Utah, 1996), which also considered and declined to follow New York's Hutt decision, and in Rego v. Connecticut Insurance Placement Facility, 218 Conn. 339, 593 A.2d 491 (1991).
Another weakness in the New York rule, as created by Hutt, is that it ignores the crucial effect of circumstantial evidence in arson cases.
Since "a motion picture of the arsonist in the act *** is most unlikely,"17 the resultant unavailability of direct proof of arson not only permits but virtually compels the insurer to rely solely upon meticulously developed circumstantial evidence to establish the elements of its defense, i.e., the incendiary nature of the fire and the insured's motive and opportunity to set it;18 hence there is no possible justification for adding to the insurer's burden by requiring it to do so by more than a "fair preponderance of the evidence [Appleman, Insurance Law and Practice (1980) §12682].
Thus, as the Horrell court has perceptively written:
[D]ue to the inherent difficulties in proving arson, 'which is usually based on secret preparation and activity,' (State v. Dronzank, 671 P. 2d 199, 200 (Uta, 1983), we consider it inequitable to require insurance companies to establish the defense of arson by clear and convincing evidence, while insureds can demonstrate breach of the same contract under the preponderance of the evidence standard." - Horrell v. Utah Farm Bureau Insurance Company, supra, 909 P. 2d 1279, 1282.
It is of interest that the same court that decided Hutt found nothing inequitable or even incongruous in the fact that in an arson case "The plaintiff had to establish its case by a preponderance of the evidence and the defendant had to prove its three affirmative defenses [arson and false swearing] by clear and convincing evidence." [Long Island Ski Center, Inc. v. Hartford Fire Insurance Company, 121 A.D.2d 368, 502 N.Y.S.2d 800 (2d Dept. 1986)].
Also implicit in the question of the burden of proof is its impact on public policy.
Because it is clearly against public policy to permit "an insured to recover as a result of fraudulent conduct, which said conduct may also constitute a crime," such as arson19, it necessarily follows that it is equally against public policy to insist upon a rule that makes it easier for the arsonist to profit by raising the insurer's required standard of defensive proof from "preponderance" to "clear and convincing." This point was perceptively made in two recent cases, Italian Fisherman and Horrell,20 in which the latter court most aptly wrote (p. 1282):
Finally, our decision to adopt the lower preponderance standard is also motivated by the strong public policy precluding recovery for arson. Dairy Queen, 248 P. 2d at 1172; Nieses, 696 P. 2d at 378.
It is significant that, while Hutt and its progeny were engaged in tipping the judicial scales in favor of arsonists, they completely avoided addressing this serious question of public policy.
Another factor undermining the validity of the Hutt-inspired series of decisions is their one-sided emphasis on the defendant's burden of proof and their failure to discuss, or even mention, the plaintiff's burden of proof on the specific issue of fortuity, since that issue, which is immediately raised by the introduction of evidence of willful burning, requires both the plaintiff and the court to deal with it, as mandated by these principles: (1) for a loss to be covered by insurance it must be "fortuitous"21; (2) it is not fortuitous if it results from, inter alia, the fraud or other misconduct of the insured22; and (3) the insured has the burden of proof that the claimed loss was, indeed, fortuitous.23
Finally, it is significant that the same court that originally decided Hutt sought to enhance the legitimacy of that ruling by repeatedly citing it as authority in several later cases, presumably on the theory expressed in Lewis Carroll's "The Hunting of the Snark" that "What I tell you three times is true."24
Especially notable among these was the utterly absurd decision in Hutt's immediate successor, Rossi v. Hartford Fire Ins. Co., 103 A.D.2d 771, 477 N.Y.S.2d 402 (2d Dept. 1984).
There, the appellate court not only acknowledged that "There was an abundance of evidence from which a jury could find that plaintiff had willfully participated in the burning of her building," but also knew, from its decision in an earlier appeal in the same case, that the fire in question had "been determined by local authorities as unquestionable arson."25 Nevertheless, and despite that "abundance of evidence," it reversed a judgment in favor of the insurer on its arson defense on the sole ground that the trial judge had committed "substantial error" when he charged "preponderance" instead of "clear and convincing" as mandated by Hutt.
Completely unexplained in the Rossi decision was how the trial judge's charge could possibly have been in violation of the rule established in Hutt when the charge in question had been given to the jury in April 1982, a good sixteen months before Hutt was reported in August 1983!
Yet Rossi is frequently cited, along with Hutt, as authority for the "clear and convincing" rule in arson cases in New York.
Conclusion
Clearly, a rule of law that requires "clear and convincing evidence" to establish the defense of arson benefits the arsonist and victimizes the insurer, and hence grossly violates sound public policy. It is therefore not surprising that the overwhelming weight of authority in this country has repeatedly adhered to "preponderance of the evidence" and rejected "clear and convincing evidence" as the required burden of proof in arson cases.
Since New York was lured into adopting the unacceptable minority position of "clear and convincing evidence" by the deeply flawed decision in Hutt and its uncritical followers, it should rejoin the majority, return to its hundred-year-old pre-Hutt precedent of the "preponderance of the evidence," and thereby re-level the now tilted playing field between arsonist and insurer.
Endnotes
1 25 Hun 251 (4th Dept. 1881).
2 Seybolt v. The N.Y., L.E.&W.R.R. Co., 95 N.Y. 562, 569 (1884).
3 Kurz v. Doerr, 180 N.Y. 88, 92 (1904); see also People v. Briggs, 114 N.Y. 56, 65 (1889); New York & Brooklyn Ferry Company v. Moore, 102 N.Y. 667, fully reported in 18 Abb. N.C. 106, 112 (1886); Serra v. Brooklyn Heights R. Co., 95 App. Div. 159, 88 N.Y. Supp. 500, 501 (2d Dept. 1904).
4 Zaitchick v. American Motorists Ins. Co., 554 F.Supp. 209 (S.D.N.Y. 1982), aff'd 742 F.2d 1441, cert. den. 104 S. Ct. 162, 464 U.S. 851.
5 Demyan's Hofbrau, Inc. v. INA Underwriters Ins. Co., 542 F.Supp. 1385 (S.D.N.Y. 1982).
6 95 A.D.2d 255, 466 N.Y.S.2d 28, 30 (2d Dept. 1983).
7 Id., 466 N.Y.S.2d, at 31, Fn. 4. On the retrial, the insurer again prevailed.
8 Rossi v. Hartford Fire Ins. Co., 103 A.D.2d 771, 477 N.Y.S.2d 402 (2d Dept. 1984); Long Island Ski Center, Inc. v. Hartford Fire Ins. Co., 121 A.D.2d 368, 502 N.Y.S.2d 800 (2d Dept. 1986).
9 Malek v. Federal Insurance Company, 994 F.2d 49, 55 (2d Cir. 1993).
10 PJI 1:64
11 Wisconsin: Jonas v. Northeastern Mut. Fire Ins. Co., 44 Wis. 2d 353, 171 N.W. 2d 185, 187, N. 1 (1969); Ziegler v. Hustisford Farmers Mut. Ins. Co., 238 Wis. 238, 298 N.W. 610, 612 (1941); Virginia: Mize v. Hartford Ins. Co., 567 F.Supp. 550, 552 (W.D. Va. 1982). Carpenter v. Union Ins. Soc., 284 F.2d 155, 162 (4th Cir. 1960), cited by Hutt as representing the "clear and convincing" standard in South Carolina, was declared to be "in error" in a later South Carolina case, Rutledge v. St. Paul Fire and Marine Ins. Co., 286 S.C. 360, 334 SE2d 131, 138 (App. 1985). McGory v. Allstate Ins. Co., 527 So. 2d 632, 636 (Miss. 1988) appears to be in conflict with four earlier federal court cases in Mississippi which upheld "preponderance of the evidence."
12 Up to date collections of these cases appear in the following texts: 19 Couch, on Insurance (2d Ed. 1983); §§ 74:667, 79:447; 21 Appleman, Insurance Law and Practice (1980) §12229 and 21b Id., §12682; and in several recent decisions: Horrell v. Utah Farm Bureau Insurance Company, 909 P. 2d 1279 (Utah 1996): Dairy Queen v. Travelers Indem. Co., 748 P. 2d 1169, 1172 (Alaska 1985); Italian Fisherman, Inc. v. Commercial Union Assurance Company, 215 N.J. Super. 228, 521 A.2d 912 (1987).
13 Hutt, supra, 466 N.Y.S.2d, at 30, note 2.
14 Proponents of New York's minority position could, of course, take refuge in the words of the famous World War I song: "They Were All Out Of Step But Jack."
15 McCormick, on Evidence (2d Ed. 1980) §340, note 72.
16 Supra, note 12.
17 Boone v. Royal Indemnity Company, 460 F.2d 26, 29 (10th Cir. 1972).
18 Elgi Holding, Inc. v. Insurance Co. of North America, 511 F.2d 957, 959 (2d Cir. 1975).
19 Astoria Quality Drugs, Inc. v. United Pacific Insurance Company of New York, 163 A.D.2d 82, 557 N.Y.S.2d 339, 340 (1st Dept. 1990).
20 Supra, note 12.
21 Northwestern Mutual Life Insurance Co. v. Linard, 498 F.2d 558, 561 (2d Cir. 1974).
22 See, e.g., Goodman v. Fireman's Fund Ins. Co., 600 F.2d 1040 (4th Cir. 1969); University of Cincinnati v. Arkwright Mut. Ins. Co., 51 F.3d 1272 (6th Cir. 1995).
23 Vasile v. Hartford Accid. & Indemnity Co., 203 A.D.2d 541, 624 N.Y.S.2d 56 (2d Dept. 1995).
24 See American Machine & Foundry, Inc. v. Santini Bros., Inc., 54 Misc. 2d 886, 283 N.Y.S.2d , 578 (Sup. Ct. N.Y. Co. 1967), aff'd 362 N.Y.S.2d 402.
25 Rossi v. Hartford Fire Ins. Co., 72 A.D.2d 548, 420 N.Y.S.2d 725, 726 (2d Dept. 1979).
HAS THE FLOOD EXCLUSION BEEN WASHED AWAY?
Aaron F. Fishbein
So far, this year has been one of the rainiest on record. California, Oregon, and Washington have had torrential downpours, and this June hardly a single day went by without rain. Homeowners have been inundating their insurance companies with claims for water damage to their houses, even though their homeowners policies contain flood exclusions. Can homeowners' attempts to avoid the consequences of the flood exclusion hold water? In Indiana Ins. Co. v. Liaskos, 1998 WL 331669 (Ill. App. 1st Dist. June 24, 1998), the Appellate Court of Illinois answered, "it depends."
The Facts
On June 28, 1993, Janet Liaskos, a Calumet City, Illinois homeowner, was awakened in the middle of the night by a loud exploding noise. Investigating, she discovered that the basement was flooded almost to the floor joists. The first floor interior walls and the exterior masonry were cracked, and a crater had formed in the ground outside the house. A structural engineer retained by Ms. Liaskos determined that abnormally high water pressure in the Calumet City sewer system had over stressed the plumbing, causing pipes to break. Water pressure from the broken pipes pushed up and cracked a basement floor slab, allowing water to gush into the basement. Ms. Liaskos lived away from home for a day because the electricity had to be turned off. Luckily for her, the home's structural integrity was not impaired. 1998 WL 331669 at *1-2.
The Indiana Insurance Company homeowners policy issued to Ms. Liaskos provided coverage for physical loss to the dwelling or structure. The policy contained this flood exclusion:
We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.
* * *
3. Water Damage, meaning:
a. flood, surface water, waves, tidal water, overflow of a body of water, or spray from any of these, whether or not driven by wind;
c. water below the surface of the ground, including water which exerts pressure on or seeps or leaks through a building, sidewalk, driveway, foundation, swimming pool or other structure. If such water causes the collapse of a building or any part of a building, we cover loss caused by the collapse. Collapse does not including [sic] settling, cracking, shrinking, bulging or expansion.
Holding that the flood exclusion precluded coverage, the trial court ruled that the collapse exception to the flood exclusion did not apply. The trial court found that although cracking and settling had caused some structural damage, there was no "collapse" because the house "had not lost its character," and because there was no evidence of "something going down." Id. at *2.
Two Competing Views
The homeowners policy did not define the term "collapse." On appeal, the Appellate Court of Illinois discussed two competing interpretations of that term. The older, and now minority, view is that the term "collapse" is unambiguous and means that "the entire building must lose its distinctive character as a building." The building must have become a "mere ruin," a "mass of rubbish." Rubenstein v. Fireman's Fund Ins. Co., 339 Ill. App. 404, 409-10, 90 N.E.2d 289, 291-92 (1950).
The newer, majority view is that the term "collapse" means any substantial impairment of the structural integrity of a building. In Beach v. Middlesex Mut. Assurance Co., 205 Conn. 246, 532 A.2d 1297 (1987), a flood caused a foundation wall of the insured's house to crack. That crack widened over the next few months, causing the wooden support beams on top of the foundation wall to spread apart. The foundation wall shifted and leaned over, so that it could no longer support the building. Despite this damage, the house remained standing and the insured continued living in it. The trial referee found, however, that "eventually the house would have fallen into the cellar." 205 Conn. at 249, 532 A.2d at 1299.
The insurer denied coverage on the ground that the collapse exception to the flood exclusion did not apply because the house had not suddenly and completely fallen in. The court rejected the insurer's position. The court held that the term "collapse" was ambiguous because Webster's Third New International Dictionary defines the word collapse as both a sudden, catastrophic breakdown and a loss of structural strength. The court consequently applied the rule of contra proferentum to rule that "collapse" means "any substantial impairment of the structural integrity of a building." 205 Conn. at 251-52, 532 A.2d at 1300. The court therefore found the insurer liable for coverage.
The Liaskos court noted that it preferred the majority view, and that it would hold that a collapse does not require that the building be destroyed or fall in or that the loss result from a sudden catastrophic occurrence. Instead, it would hold that "a collapse will be deemed to have occurred where a falling in is imminent or where there is any substantial impairment of the structural integrity of the building." (citations omitted.) 1998 WL 331669 at *7.
The court's stated preference for the majority view was only dictum because the court held that under either interpretation the damage to Ms. Liaskos's home did not constitute a collapse. There was no evidence that the structural integrity of the building had been substantially impaired. The crack in the basement foundation wall had not widened, the foundation wall did not move, and it continued to support the house. While the dwelling was uninhabitable for a day, the uninhabitability was due to the presence of water and lack of electricity, not to any unsoundness of the structure. Id. at 7-8.
INNOCENT CO-INSUREDS
-Hillary M. Henkind
If an insured commits an intentional act such as arson, should an innocent co-insured be precluded from coverage for the resulting property damage? Three recent decisions suggest that the answer to this question may turn on the use a single word in the insurance policy: "any" or "an". The three decisions, USAA Cas. Ins. Co. v. Gordon, 707 So.2d 1185 (Fla. 1998), Kundahl v. Erie Insurance Group, 703 A.2d 542 (Penn. 1997), and K&W Builders, Inc. v. Merchants and Business Men's Mut. Ins. Co., 495 S.E.2d 473 (Va. 1998), all involve an innocent co-insured seeking coverage for property damage caused by the intentional acts of another insured.
In USAA, a husband sought coverage under his homeowners' policy for property damage intentionally inflicted by his estranged wife. The insurer, while acknowledging that the husband played no role in the property destruction, denied coverage to the husband on the basis of the "intentional loss" exclusion, which provided:
We do not insure for loss directly or indirectly caused by any of the following:
h. Intentional Loss, meaning any loss arising out of any act committed:
(1) by or at the direction of any insured;
and
(2) with the intent to cause loss.
[Emphasis added]
The Court said that whether an "innocent insured" like the husband can collect insurance proceeds for damage unilaterally caused by a co-insured depends upon whether the insurance policy provides "joint" or "several" coverage. Relying on the "intentional loss" exclusion, the Court held that it had "no trouble concluding that exclusion (h), which excludes coverage for damage caused by `any insured,' unambiguously results in joint property coverage." Accordingly, the Court denied coverage to the husband as a result of the intentional acts of his co-insured wife.
In Kundahl, a wife brought suit against her homeowners' and automobile insurer to recover for loss of her house and car after her husband intentionally set fire to the house. The relevant exclusionary language of the homeowners' policy was:
We do not cover loss resulting directly or indirectly from any of the following:
(15) Caused by intentional acts, meaning any loss arising from an act committed by or at the direction of anyone we protect with the intent to cause a loss. [Emphasis added]
Similarly, the intentional acts exclusion of the automobile policy provided that the company would not pay for loss "caused intentionally by or at the direction of you or a relative." [Emphasis added]
As in USAA, the Court in the Kundahl case noted that if the parties' interests in the policy are joint, then the innocent co-insured would be precluded from coverage because of the intentional acts of another co-insured. On the other hand, if the parties' interests are several, an innocent co-insured cannot be denied coverage as a result of the intentional actions of another insured. Examining the exclusionary language in the homeowners' policy, the Court emphasized that the policy specifically precluded coverage where the intentional act by "anyone we protect" caused the ensuing loss. Moreover, the Court found that the reference to a loss caused by "anyone we protect" unequivocally denotes joint responsibility because "the term `anyone' is naturally inclusive as opposed to exclusive." Accordingly, the Court held that if any one insured violates the terms of the policy, coverage must be denied to all insureds.
The Court also held that the language of the automobile policy "unequivocally imposes joint obligations on its insureds" because the policy's definition of "you" included the subscriber and the subscriber's spouse if the spouse lives at the same residence. Noting that the wife not only lived with her husband at the time he set fire to their house but also was a signatory to the insurance contract, the Court held that the wife was precluded from coverage under the automobile policy as a result of the intentional acts of her husband.
Finally, in K&W Builders the owner of a building sued its property insurer seeking coverage for damage resulting from arson committed by the co-insureds who were occupants of the building. A jury found that the fire had been set by or at the direction of the insured occupants of the building. As grounds for its denial of coverage, the insurer pointed to the fraud provision and the dishonest act exclusion of the policy. The fraud provision of the policy provided, in pertinent part:
This Coverage Part is void in any case of fraud by you as it relates to this Coverage Part at any time. It is also void if you or any other insured, at any time, intentionally conceal or misrepresent a material fact... [Emphasis added]
The dishonest act exclusion of the policy, also relied upon by the insurer when it denied coverage, precluded coverage for "dishonest or criminal act by you, any of your partners, employees, directors, trustees, authorized representatives or anyone to whom you entrust the property for any purpose." The Court interpreted the two provisions to mean "that coverage will be void in the event K&W or either of its coinsureds acted fraudulently or intentionally, concealed or misrepresented a material fact ... or commits a dishonest or criminal act." Accordingly, the Court held that the property insurer properly disclaimed coverage to the "innocent co-insured."
The policy provisions discussed in USAA, Kundahl, and K&W Builders are in stark contrast to provisions using the term "an insured" or "the insured" in the intentional acts or dishonest acts exclusion. See, e.g., Taryn E.F. v. Joshua M.C., 505 N.W.2d 418 (Wis. 1993). In Taryn, the parents of a sexually molested daughter brought an action for damages against a minor babysitter, his parents, and their homeowners' insurer. All parties agreed that the homeowners' policy would not provide coverage to the minor babysitter who engaged in the intentional act of molestation. The plaintiffs claimed, however, that because the babysitter's parents were innocent insureds who did not participate in or encourage their son's acts, they were entitled to coverage despite the fact that coverage was precluded for their son.
The intentional acts exclusion in the Taryn case provided:
The insurance afforded by this policy shall not apply to any damages to property or for bodily injury attributable to a willful, malicious, wanton or otherwise intentional act of the "insured" or performed at an "insured's" direction or for any outrageous conduct on the part of any "insured" consisting of any intentional, wanton, malicious acts, or, in addition, any act that would constitute wanton disregard for the rights of others. [Emphasis added]
The Court, relying on the latter part of the exclusion containing the phrase "any insured," concluded that such language unambiguously precluded coverage for "all liability incurred by each and any insured as a result of certain conduct by any of the persons insured by the policy." Accordingly, as the minor babysitter was an insured under the policy, his co-insured parents were also precluded from coverage because of the intentional acts of their son.
The Taryn Court distinguished the policy language contained in the homeowners' policy from the language of a policy examined in another case, Northwestern Nat'l Ins. Co. v. Nemetz, 400 N.W.2d 33 (Wis. App. 1986). In Nemetz, the policy excluded coverage for damages "expected or intended by an insured person" and damages "intended or expected by the insured." [Emphasis added] Relying on the use of the words "the" and "an," as opposed to "any," the Nemetz Court held that the exclusionary clauses precluded coverage for the insured who committed the excludable acts, but not for the innocent co-insured.
Although the plaintiffs in Taryn argued that there was no logical or grammatical difference between "an" and "any," the Court disagreed:
"An" is an indefinite article used before nouns beginning with a vowel or, sometimes, a soft consonant ... instead of the related indefinite article "a."... "A" is "used as a function word before most singular nouns [or] to suggest limitation in number. ... "Any" is defined as "one indifferently out of more than two: one or some indiscriminately of whatever kind ... one, no matter what one. ... Thus, the distinction between "an" and "any" is that the former refers to one object (an oak tree) and the latter refers to one or more objects of a certain type (any person).
Unlike the phrase "the insured" or "an insured," the phrase "any insured" unambiguously expresses a contractual intent to create joint obligations and to prohibit recovery by an innocent co-insured. See Chacon v. American Family Mut. Ins. Co., 788 P.2d 748 (Col. 1990), citing Sales v. State Farm Fire & Cas. Co., 849 F.2d 1383, 1385 (11th Cir. 1988). Thus, according to the majority view, if an intentional acts exclusion or similar exclusion uses the term "an insured" or "the insured," as opposed to "any insured," an innocent co-insured will most likely not be denied coverage despite the intentional acts of other co-insureds.
FOLLOW THE FORTUNES - BUT NOT FOR EX GRATIA PAYMENTS
Mitchell D. Otto
In Lexington Insurance Co. v. Prudential Reinsurance Company of America, No. 95-4083 (Mass. Super., Suffolk Co. 1997), the Massachusetts Superior Court demonstrated that there are limits to the "follow the fortunes" reinsurance doctrine when a reinsured provides coverage for an insured's willful acts. Suffolk County Superior Court Justice Peter M. Lauriat's June 24, 1997 opinion in that case held that a reinsurer was not required to reimburse a comprehensive general liability insurer for its voluntary settlement with an insured accused of conversion, because that insurer's provision of coverage for its insured's willful act constituted an ex gratia payment.
In that case, the Union Bank of California was insured under a CGL policy by Lexington Insurance Company. Lexington in turn reinsured a portion of this risk with Prudential Reinsurance Company of America, now known as Everest Reinsurance Corporation. Union Bank was sued by numerous parties for fraudulent misrepresentation and a host of other claims related to a line of credit the bank had issued to an automobile dealership. It was alleged that the Union Bank had acted fraudulently in an attempt to pass on to other entities losses associated with this credit line.
Lexington's counsel eventually reached the conclusion that coverage could be found for Union Bank under a provision in the Lexington policy that covered "wrongful conversion." As a result, Lexington paid Union Bank four million dollars in satisfaction of all liability of Union Bank's claims against Lexington. Lexington then commenced an action against Everest seeking to collect the reinsurer's share of the liability and expenses. Both Lexington and Everest filed motions for summary judgment.
In assessing the reinsurer's liability, the court noted that as a general rule the "follow the fortunes" doctrine of reinsurance requires a reinsurer to provide coverage when the reinsured suffers losses as a result of litigation or settlement. Thus, the court said, the insured and reinsured generally share the same fate and the reinsurer must accept, for the most part, the misfortunes that give rise to claims under the original risk. The court added, however, that this doctrine is inapplicable where the payment by the cedant was clearly and unambiguously outside the scope of its policy. Such a payment is considered ex gratia and does not bind the reinsurer.
The reinsurer's obligations were analyzed under California law because the Union Bank policy was domiciled in that state. Everest argued that it was not required to reimburse Lexington because Lexington was under no obligation to pay its insured pursuant to California Insurance Code § 533. This provision states that "[a]n insurer is not liable for a loss caused by the wilful act of the insured." Cal. Ins. Code § 533 (West 1998). The court noted that § 533 is a part of every California insurance contract, and has the operative effect of an exclusionary or exculpatory clause. It was determined by the court that § 533 would be applicable so long as the insured's conversion was deemed willful. The court concluded that conversion requires willfulness under California law, citing Collin v. American Empire Ins. Co., Inc., 26 Cal. Rptr. 2d 391, 404 (1994), where it was succinctly stated:
"[T]he essence of 'conversion' is the exercise of domination over the property of another, [and] virtually every court to consider the question has agreed that 'conversion' cannot occur accidentally."
Lexington, relying upon Clemmer v. Hartford Insurance Co., 151 Cal. Rptr. 285, 297 (1978), contended that in order for § 533 to be applicable the insured's act must not only be willful but must also be done with a "preconceived design to inflict injury." The court found that recent California decisions had moved away from the "preconceived design" standard and that the standard was inapplicable where the insured's wrongful act was inherently harmful. In addition, the court noted that the types of acts Union Band had allegedly committed, such as fraudulent concealment, had previously been found to trigger the application of § 533, citing Employers Insurance of Wausau v. Musick, Peeler & Garrett, 871 F. Supp. 381, 386, modified on other grounds, 948 F. Supp. 942 (S.D. Cal. 1994). Moreover, the court concluded that the application of California Insurance Code § 533 in this instance was in accord with general principles of insurance as CGL policies generally cover accidents and not intentional occurrences.
Although Lexington's decision to settle with its insured was found to have been made in good faith, Lexington's determination that it was obligated to pay its insured under the policy was legally incorrect. In determining that the insured was covered because it had committed wrongful conversion, Lexington had established that the insured's actions were by their very nature intentional. As a result, California Insurance Code § 533 excluded coverage for the insured's willful act. Thus the court ruled that Lexington's settlement with its insured was clearly outside the parameters of the Lexington policy and constituted an ex gratia payment. Accordingly, summary judgment was entered in favor of the reinsurer.
The implications of this opinion are clear. As an initial matter, a CGL insurer that provides coverage for the willful acts of its insured in California does so at its own peril. More importantly, the opinion demonstrates once again that reinsurers are required to follow the fortunes of their reinsureds only so far. Where, as here, the reinsured makes a payment that is outside the scope of its policy, the reinsurer will not be required to reimburse its reinsured for such an ex gratia payment.
JURY SELECTION IN INSURANCE FRAUD TRIALS
Mitchell S. Cohen
To select a jury, trial lawyers make ad hoc decisions about dozens of people. The decisions are, at best, often informed guesswork. Yet many believe that the outcome of a trial can be dictated by the composition of the jury and that crucial moments of the trial take place even before opening statements. For this reason, experienced trial lawyers approach jury selection with a framework in mind of the type of people to avoid as jurors as well as those who are preferable for the case. In an insurance fraud trial, special attention should be given to the selection of jurors who will become the trial audience. After all, the insured and the insurer intend to present very different cases.
Needless to say, a receptive audience is the goal of jury selection. An insured who sues his insurer has a straightforward case to present. A premium was paid, a policy was issued, a loss happened, the claim was presented, and the insurer refused to honor its commitment. Although there may be some window dressing to spur the jurors to believe that this claim is like so many other instances of an insurer seeking to escape its obligations, the plaintiff is presenting a breach of contract claim where the terms of the contract are not at issue and the claimed breach is obvious.
On the other hand, the insurer will be asking the jury to find that the plaintiff is a liar, and to do so after offering a case that is largely based upon circumstantial evidence. Whether the loss involves a fire set by arson, water damage to electrical goods, or some more inventive method of loss, there almost certainly will not be any eyewitnesses to testify that the insured was observed lighting a match, breaking a pipe, or otherwise causing a loss. Rather, the circumstances involving the loss will be painted through various witnesses as being suspicious and being under the sole control of the insured. In addition, if the amount of the claim itself is being challenged (as it usually is in a fraud litigation), the defense will likely produce witnesses to testify about the fair value of the goods in contradiction to the insured's claim.
In short, the insured's claim that a policy was issued and not honored is not disputed. For this reason, trial judges sometimes require the insurer to present its defense first and to allow the jury to rule on whether the claim is fraudulent because if it is not, coverage is often conceded. No matter how the trial is structured, however, its outcome often comes down to one issue and very few crucial witnesses. The issue is, of course, credibility and the crucial witnesses are the insured's principal(s) and those who have calculated the loss. The attorney for the insurer knows well that if the insured's principal leaves the witness stand with his or her credibility intact, the case cannot be won. Thus, there will be a direct character attack and, depending on the examining lawyer's style, it can be hostile, sarcastic, or understated, but it cannot be flattering. Some people may find the cross-examination entertaining, but others may be offended. In addition, for the insurer to prevail the jurors need to be outraged by the attempted fraud and the audacity of the effort. Among the pool of jurors, there are those who can easily be provoked into moral outrage and others who may be sympathetic to even the most blatant scam. The task of the trial lawyer in jury selection, working from the limited information provided during the jury selection process, is to determine into which camp prospective jurors fall.
Jury selection procedures vary from jurisdiction to jurisdiction. For example, in New York State trial courts, jury selection is usually accomplished in small rooms annexed to the courtroom without a judge being present (but available for rulings). An honor code as to what can or cannot be said to the prospective jurors is followed and a time limit is sometimes imposed on the selection process. In other states, jury selection takes place in the courtroom with the trial judge presiding but the attorneys are given the opportunity to speak directly to the jurors after opening remarks by the judge. A third procedure, widely employed in the federal courts, is for the judge to conduct very general questioning of the potential jurors with little, if any, opportunity for questioning by attorneys. Needless to say, the more information an attorney can obtain about an individual the better the evaluation of the juror. Here then, are broad categories to use in evaluating people as jurors for an insurance fraud trial.
CHARACTERISTICS AND ANALYSIS
1. Employment. A person's work can tell a lawyer a great deal about how that person will view the case. For example, is the person employed in an industry notorious for unreported income? Many people who have a cash income may not be troubled by an insured's explanation that the value of his lost inventory exceeds the amount stated on a tax return because the inventory is minimized for tax purposes. On the other hand, an employee who receives a W2 form and files a straightforward tax return will not be sympathetic to any suggestion of financial game-playing. Others who work in a field dependent on trust or subject to intense regulatory scrutiny may also be easily outraged by an insured's admission that the insured knowingly signs a false financial statement.
2. Entrepreneurship. Is the prospective juror a person who has taken financial risks, operates a business, or in some way pursues speculative opportunities? If so, that juror might root for a small business owner seeking a large recovery from an insurer. Such a person also might be sympathetic to claims that bookkeeping errors can be ascribed to sloppiness without any pecuniary motive.
3. Prior Jury Service. Nowadays it seems that most jurors have served on a jury before. Depending on the jurisdiction a lawyer may learn a little bit about the prior case, e.g., civil or criminal, and whether the jury found for or against the defendant. This little bit of information is not especially insightful but it is generally helpful to know about the earlier jury experience. In a fraud case, the defense lawyer is asking the jury to find that the insured's principal has taken the witness stand, sworn to tell the truth, and then proceeded to lie at length, in detail, and with apparent sincerity. Has the individual's prior jury experience left a potential juror so jaded that anything short of a scathing cross-examination leading to a confession on the stand would be insufficient? 4. Personality. How will the potential juror react to the cross-examination, regardless of the style of its presentation, and the suggestion that the witness is intentionally violating the oath? Will the cross-examination be made before a cynical group receptive to the suggestion that the claim cannot be true? Is the juror from a sheltered background who might find a confrontational approach rude and offensive? If so, this juror can easily sympathize with the insured who is being picked on by a lawyer. There are some who, perhaps because of religious belief, simply will not accept the proposition that a person will intentionally lie under oath. If this person is on the jury, not even the most effective cross-examination will succeed.
5. Prior Experience With An Insurer. This is almost too obvious to mention. Disgruntled insurance customers are excellent jurors for the insured and to be avoided at all costs by the insurer.
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No checklist can ever be complete -- especially when the subject is evaluating people. The point is, however, that an insurance fraud trial, like any trial, is the culmination of much work and expenditure of resources. At the very least, litigants need an audience that will be receptive to their respective messages. When the jury is composed of people who are not likely to listen, a lot of otherwise good lawyering will be wasted.
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