12/21/2002· Insurance Coverage Analysis
An insurer may rescind its policy in the event of material misrepresentation or concealment of a fact by the insured. Misrepresentation is false statement of a fact by the insured
As Originally Published by Journal of Risk Education, Vol. 11, No.1 2020/2021, pp.78-86
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In Spring 1997, the author embarked on a career as a testifying expert witness in breach of contract/bad faith Insurance and Risk Management (IRM) cases, as well as IRM agent/broker errors and omissions cases; the goal was to enrich the author’s teaching and research, as well as to supplement his university income; since embarking on this career as a testifying expert witness in 1997, the author has been retained on both the plaintiff side and the defense side in about 90 cases in which either an expert report and/or deposition was required; several of these cases served as a basis for a publication in a refereed professional journal or a pedagogical journal, and many of these cases have been used by the author for illustrative purposes in the classroom. The purpose of this teaching case study is (1) to present an illustrative first-party legal case in which the author was retained as a testifying expert witness by a plaintiff attorney, and reference how it can be used in the classroom to illustrate important IRM concepts in an introductory, undergraduate, IRM course, and (2) encourage IRM colleagues to serve as a testifying expert witness in IRM cases, thereby enriching their professional careers, while at the same time expose some of the practical problems commonly encountered when taking on an expert witness assignment on the plaintiff side; in this way, an IRM academic can develop a reservoir of experience that can be used by the IRM academic to enrich the classroom through the use of illustrative legal cases that demonstrate the application of important IRM concepts.
While the author has been retained in several cases to testify on behalf of the insurer (the defense), most of the opportunities have been on the plaintiff side. Attorneys on the defense side (the insurer) tend to retain testifying expert witnesses who have spent a very substantial portion of their professional careers working for insurers as claim representatives adjusting insurance claims; the basis for their testimony usually is years of experience adjusting insurance claims, or supervising the handling of insurance claims. Attorneys on the plaintiff side are receptive to retaining IRM academics who have devoted most of their professional careers to teaching IRM, as well as legal concepts to undergraduate IRM students, some of whom become claim representatives for insurers upon graduation; the basis for the testimony of an IRM academic usually is knowledge of textbook IRM and legal concepts, as well as teaching countless undergraduate IRM students over the years, some of whom became claim representatives working for prominent insurers.
Usually the plaintiff attorney needs a testifying expert who can (1) undertake a detailed coverage analysis, identifying and resolving the key coverage issues that will ultimately determine the outcome of the breach of contract case (i.e., the insurer usually either denied the claim outright, or paid a substantially reduced amount), (2) undertake a detailed analysis of the handling of the insurance claim by the claim representative (e.g., the insurer unreasonably denied a policy benefit, or failed to conduct an adequate investigation, and subject the findings of such an investigation to a reasonable evaluation and review, meaning that the insurer processed the insurance claim in bad faith, and (3) apply basic legal concepts such as “notice” in evaluating the handling of the insurance claim.
Usually the goal of a plaintiff attorney in litigating an insurance claim is to overcome an insurer’s Motion for Summary Judgment, which asserts that there was no breach of contract/bad faith as a matter of law. If such a Motion is denied by the court, usually an out-of-court settlement can be obtained because the insurer is very reluctant to try an IRM case in a jury or bench trial because of the cost and uncertainty associated with such a trial. That being the case, an important role served by an IRM academic is to draft a Declaration opposing the insurer’s Motion for Summary Judgment, asserting that, at a minimum, there are factual issues precluding the trial court from granting the insurer’s Motion for Summary Judgment. If the trial court rejects the insurer’s Motion for Summary Judgment, the plaintiff attorney usually is in a favorable position to negotiate an out-of-court settlement with the insurer. If, however, the trial court rules in favor of the insurer with respect to a Motion for Summary Judgment, then the case usually is dismissed with prejudice, meaning that the insurer wins as a matter of law, and an out-of-court settlement is not obtained, although the plaintiff attorney may file a Motion for Reconsideration with the trial court judge, or alternatively take the case to the appellate court. Appellate courts, as a general rule, however, tend to defer to the trial court judge unless there is a compelling reason to overturn the trial court decision. Thus, the financial stakes can be huge for the plaintiff attorney, who oftentimes take breach of contract/bad faith cases on a contingency fee basis, although the client may absorb the expenses of litigation such as an expert witness fee.
Of course, oftentimes an insurance claim in litigation is fraught with problems; otherwise, the insurer would have simply processed and paid the claim, thereby avoiding a potential bad faith allegation. The case may have some “bad facts,” notwithstanding the fact that a strong case can be made by the expert to the effect that (1) the claim is covered under the terms of the applicable policy (i.e., there was a breach of contract), and (2) the claim representative failed to meet the standard of care in the jurisdiction in question with respect to the adjustment of the claim, and/or failed to conduct a proper investigation pursuant to the applicable Unfair Claims Settlement Practices statute. While “bad facts” arguably may have nothing to do with the substantive issues in the case, “bad facts” may be difficult to overcome in terms of receiving a favorable ruling from the trial court judge concerning an insurer’s Motion for Summary Judgment on the breach of contract/bad faith issue.
In this teaching case study, an illustrative case is discussed in which the author served as a testifying expert witness on behalf of the plaintiff concerning an excavator theft claim the policyholder presented under a Commercial Inland Marine policy that was outright denied by the carrier. Most importantly, from a substantive standpoint, the plaintiff’s case was very strong because (1) a reasonable investigation by the insurer would have uncovered indisputable facts that clearly indicated the plaintiff’s excavator theft claim was legitimate as opposed to fraudulent, (2) the insurer completely ignored the distinction between inland marine insurance and property insurance in its processing of the excavator theft claim, meaning that a breach of contract was committed by the insurer, and (3) the insurer’s strict reading of the Recovered Property condition was at odds with the intent of the parties to the contract, and the reasonable expectations of the policyholder. Notwithstanding this strong case, the trial court judge still granted the insurer’s Motion for Summary judgment, and denied the plaintiff’s Motion for Reconsideration, which was largely, although not exclusively, based on the author’s Declaration. In carefully reviewing the trial court judge’s lengthy, written ruling rejecting the plaintiff’s Motion for Reconsideration, granting the insurer’s Motion for Summary judgment, in the author’s opinion, the trial court judge was significantly influenced by “bad facts” that arguably had no impact on the merits of the plaintiff’s case. The law firm that retained the author, however, elected not to appeal this adverse trial court ruling because (1) they had taken the case on a contingency fee basis, absorbing expenses, including the expert witness fee, and (2) it was a well-reasoned ruling from a defense perspective, and appellate courts are reluctant to reverse a trial court ruling, unless there is a very compelling reason to do so.
Relevance of Illustrative Excavator Theft Claim to the Classroom: First, as referenced above, had the insurer conducted a reasonable investigation, and subjected the findings to a reasonable evaluation and review, the insurer would have quickly uncovered facts clearly indicating that the policyholder had presented a legitimate excavator theft claim. The trial court judge ignored this fact, reasoning that the author relied on depositions of important fact witnesses taken during the discovery process that commenced when the plaintiff filed a Formal Complaint with the trial court alleging breach of contract and bad faith. The importance concerning the discernment between facts that can be easily uncovered when processing a theft claim versus facts not knowable until after the discovery process commenced is paramount in applying the law of first-party bad faith. Given that the law of first-party bad faith usually is presented in an introductory IRM course while teaching IRM students how to apply an insurance policy to an insurance claim, this illustrative excavator theft case is helpful in teaching IRM students the fundamentals concerning first-party bad faith law, and its application to first-party insurance cases.
Second, as referenced above, the distinction between an inland marine insurance policy and a property insurance policy can be important in terms of processing correctly an inland marine insurance claim; this case is illustrative of this fact. More generally, an inland marine insurance policy is not subject to a Standard Fire Policy statute, while a property insurance policy is subject to a Standard Fire Policy statute, meaning that knowledge concerning coverage features associated with an inland marine insurance policy, as opposed to a property insurance policy, is important for IRM students to fully grasp.
Third, IRM students, some of whom become claim representatives upon graduation, should be equipped to discern between relevant facts suggesting a suspicious claim, and irrelevant facts having nothing to do with the merits of an insurance claim, the consideration of which by a claim representative can be unfairly prejudicial, and which can result in the wrongful denial of an insurance claim, and an allegation of bad faith on the part of the policyholder.
The Law: As referenced above, making a case that the insurer acted in bad faith entails (1) an analysis of the manner in which the insurance claim was handled in terms of whether it met the applicable standard of care in the jurisdiction in question, and (2) an evaluation of the insurer’s investigation, or lack thereof, in terms of the facts that could have been gathered in the course of a balanced investigation, in relation to how the claim should have been disposed of, assuming that the insurer had in fact promptly investigated, and gathered all the pertinent facts, and made the appropriate settlement offer, given knowledge of these facts.
Most importantly, the analysis and evaluation referenced above must occur within the context of the standard of care applicable in the jurisdiction in question, as well as within the context of the Unfair Claims Settlement Practices Statute, which requires an insurer to investigate, and subject the findings of such an investigation to a reasonable evaluation and review. Virtually all jurisdictions have enacted this statute; while it does not create a private cause of action, most, if not all, trial court judges consider it highly relevant in making a ruling concerning bad faith as a matter of law; the same is true concerning the applicable standard of care. The standard of care varies from jurisdiction to jurisdiction; the testifying expert witness must be familiar with the specific standard of care that applies in the jurisdiction in question, and it should be referenced in the Declaration prepared by the testifying expert evaluating whether the insurer acted in bad faith in the processing of the insurance claim; furthermore, in a deposition, as a general rule, opposing counsel will make some sort of inquiry in relation to the expert’s knowledge concerning the applicable standard of care. For a detailed discussion concerning the different approaches states have taken with respect to the standard of care in first-party insurance bad faith cases, see Tennyson, Sharon and Warfel, William J., “The Law and Economics of First-Party Insurance Bad Faith Liability,” Connecticut Insurance Law Journal, Volume 16, Number 1, 2009, pp. 203-242.
Of course, a case for bad faith fails if the testifying expert cannot establish that a breach of contract occurred. That being the case, a detailed coverage analysis first must be undertaken by the testifying expert, identifying the key coverage issues, and explaining why these coverage issues should be resolved in favor of the plaintiff. Most importantly, this discussion usually will lead to a conclusion that the insurer unreasonably denied a policy benefit, which constitutes bad faith.
In some cases, however, the coverage analysis can be problematical from a plaintiff perspective; a strict reading of the policy language may lead to a conclusion that coverage is non-existent, or alternatively, that coverage is very limited in relation to the size of the claim. While the testifying expert can testify concerning the purpose of the policy language in question, arguing that a strict reading of the policy language largely nullifies coverage, and is at odds with the purpose of the policy language (meaning that a strict reading of the policy language is inconsistent with the intent of the parties to the contract, and is at odds with the reasonable expectations of the policyholder), some trial court judges are not at all receptive to this sort of coverage analysis, notwithstanding an otherwise very strong case for breach of contract/ bad faith on the part of the insurer.
Overcoming Bad Facts: As referenced above, an expert testifying on behalf of the plaintiff may be required to overcome some “bad facts” not relevant concerning the merits of an insurance claim in undertaking a coverage analysis, and asserting that the insurer acted in bad faith in its processing of the insurance claim. An illustrative case in which the author was retained by the attorney who represented Bryan Newton and Newton Environmental D/B/A Waste Away Carting LLC concerning the theft of an excavator used to demolish buildings highlights the sort of challenges that may be faced by a testifying expert witness in a breach of contract/bad faith case.
In this case, Newton arranged to acquire an excavator to be used in his business of demolishing buildings. Unfortunately, the manner in which Newton lawfully acquired the excavator, although not relevant in terms of establishing an insurable interest in the excavator, raised questions for the insurer concerning whether the cause of loss was theft (a covered peril), or unexplained disappearance (an excluded peril).
First, the person from whom the excavator was lawfully acquired (Coca) previously had served time in a correctional institution for bribery, meaning that the insurer could argue that there was some doubt concerning whether the real thief (Cutruzzula) had in fact stolen the excavator (i.e., maybe Coca or Newton removed the excavator from the yard). The insurer made this argument, notwithstanding the undisputed facts that (1) Cutruzzula had assisted Newton in transporting the excavator from Coca to Newton, (2) Cutruzzula had stored the excavator at a yard owned by his grandfather, (3) the excavator was unlawfully removed from this yard shortly after it had been delivered by Cutruzzula to this yard, and (4) two days of surveillance tapes in a security booth located at the yard, accessible only to Cutruzzula and his grandfather were conveniently deleted, or erased, which matched the time period in which the excavator was unlawfully removed from the yard.
Second, the terms of sale related to the acquisition of the excavator by Newton from Coca included a large credit toward the agreed purchase price of the excavator in exchange for Newton recovering the excavator on behalf of Coca from the previous owner of the excavator, who had defaulted with respect to a purchase agreement between the previous owner and Coca; this unusual financing transaction was the basis for an argument by the insurer to the effect that the excavator theft claim presented by Newton was suspicious.
Third, while the investigation conducted by the Pennsylvania State Police was very thorough, leaving no doubt whatsoever that Cutruzzula stole the excavator, Cutruzzula was never prosecuted criminally for theft. Most likely, such is the case because Cutruzzula eventually agreed to report the location at which the excavator was stored. This report was “anonymous”, based on the recommendation of a criminal defense attorney retained by Cutruzzula. The District Attorney elected not to file charges against Cutruzzula, most likely because property crimes of this sort were a low priority item for the District Attorney, whose office most likely was underfunded. Notwithstanding this logical explanation concerning why Cutruzzula was never prosecuted in this case, the insurer latched onto this “bad fact”, arguing that there was a reasonable basis that supported the notion that Cutruzzula did not engage in wrongdoing in this case, meaning that it had a reasonable basis to believe that Newton’s excavator theft claim was fraudulent on the part of Newton.
In New Jersey, the jurisdiction in question, bad faith is established by showing that no debatable reasons existed for the denial of a policy benefit (what is commonly referred to as the intentional tort standard). Most importantly, bad faith is measured based on the insurer’s contemporaneous knowledge at the time of denial of the insurance claim, as opposed to information developed in discovery in litigation that occurs a year or so after the theft claim was first presented to the insurer. Newton reported the disappearance of the excavator to the East Rutherford Police Department on September 8, 2016; a theft claim was presented to the insurer on September 13, 2016. Notwithstanding the fact that the insurer (1) never examined relevant surveillance footage at the yard from which the excavator was unlawfully removed, as well as surveillance footage from surrounding streets, (2) never took a statement from Cutruzzula or Daniel Ferretti (with whom Newton had a business relationship, and who first reported the disappearance of the excavator to Newton), and (3) never took a statement from a police officer at the East Rutherford Police Department, instead opting to simply exercise its rights under the terms of the policy to complete Newton’s Examination Under Oath (EUO), the trial court judge ruled that the insurer had the discretion to “hold off” in terms of conducting promptly a balanced investigation until Newton had completed his EUO. Completion of Newton’s EUO entailed submitting to the insurer documents such as Newton’s tax returns and bank records, from which the insurer hoped to infer that Newton was financially strapped, and had the motive to file a fraudulent theft claim, even though there was no basis for suspecting the submission of a fraudulent theft claim by Newton. The basis for this trial court ruling was that the “defendants [the insurer] had their suspicions pertaining to the veracity of the [theft] claim”. See August 28, 2020 trial court ruling, Newton V. The Andover Companies, Merrimack Mutual Fire Insurance Company, Superior Court of New Jersey Law Division: Bergen County; Docket No. Ber-L-5773-18; Order Denying Plaintiffs’ Cross Motion for Reconsideration and Granting Defendants’ Motion for Summary Judgment, page 15.
This trial court ruling is a clear reference to the unusual financing transaction related to the acquisition of the excavator by Newton from Coca, a “bad fact” that had no relevance in terms of whether Newton did or did not submit a fraudulent theft claim. Based on this unusual financing transaction, the trial court judge also ruled that the author’s testimony both in his expert report and his deposition was somehow, someway deficient because he “never considered the possibility that either Victor Coca or the original purchaser of the vehicle [the excavator] from whom Mr. Coca repossessed it, or Mr. Newton, may have been involved in the excavator’s disappearance from the storage yard.” See Id., at page 18.
Furthermore, in this particular case, Newton was his own worst enemy in terms of his conduct subsequent to submitting the excavator theft claim by not taking the claim process seriously, and making it a high priority in terms of complying with requests for documents from the insurer, and being readily available for a EUO. The record confirms that there were several delays and/or miscommunications concerning the scheduling of his EUO, and there was some lack of compliance by Newton in responding to the insurer requests for documents, meaning, in this case, that a partial (not full) EUO of Newton was completed by the insurer about six months after Newton first submitted the excavator theft claim to the insurer. Shortly after the partial EUO was completed, Newton then learned that the excavator had been recovered by the Pennsylvania State Police. Given that Newton simply wanted the excavator returned to him so that he could resume his excavation business (according to a CPA retained in this litigation, Newton’s loss of income during the period of time in which he was without an excavator was about $1,240,000, consequential damages in a bad faith lawsuit), pursuant to the terms under the Recovered Property condition contained in the Commercial Inland Marine policy, Newton only had a breach of contract claim for the release fee charged by the impound lot ($9,500), and the transport fee ($1,700), both of which were incurred by Newton in getting the excavator back to New Jersey from Pennsylvania (the excavator had been located in a yard in Pennsylvania based on an “anonymous” tip that had been received by the East Rutherford Police Department), assuming, most importantly, that the insurer previously had made settlement for the excavator theft claim that had been submitted by Newton, pursuant to the terms of the Recovered Property condition (a condition precedent), which, of course, was not met in this case. In this case, a settlement offer (the condition precedent) was never extended by the insurer to Newton, based on the wrongful coverage determinations made by the insurer.
While one can make a sound argument that a strict reading of the Recovered Property condition encourages insurers to deny valid theft claims, given that eventual recovery of stolen equipment is not at all unusual in cases of this sort, this argument only applies to the breach of contract portion of the case; it does not apply to the bad faith portion of the case. Such is the case because the insurer can argue that it is reasonable to rely on a strict reading of the policy language, notwithstanding the fact that the insurer made several wrongful coverage determinations in the processing of a theft claim, discussed in the section below. In this case, the trial court judge rejected the breach of contract claim, reasoning that “the recovery costs totaling $14,250 are the only compensatory damages sought by plaintiffs. As no loss settlement was made, this provision pertaining to recovered property is inapplicable on its face.”; if there is no breach of contract, then it follows that there was no bad faith. See Id., at page 19.
Most importantly, the trial court emphasized the delays created by Newton, or his previous counsel, in terms of his partially completed EUO at the time that the excavator was located at a yard in Pennsylvania on April 4, 2017, at which time the insurer closed the claim, and sent Newton a final claim denial letter on April 24, 2017, discussed in the section below.
While the trial court was correct in identifying Newton’s deficiencies (a “bad fact” not relevant in evaluating the merits of Newton’s excavator theft claim), had the insurer conducted a balanced investigation, it would have learned quickly that Cutruzzula (1) unlawfully removed the excavator from his grandfather’s yard, and (2) had it transported to upstate New York where it was stored in Steven Daley’s storage shed (with whom Cutruzzula had a prior relationship evidenced by telephone records) until it was sold to an unsuspecting third party, who then transported it to the yard in Pennsylvania from which it was ultimately recovered by the Pennsylvania State Police based on an “anonymous” tip that had been received by the East Rutherford Police Department.
In this case, the trial court judge inexplicably issued a ruling without explanation, in favor of the insurer before discovery was completed (including the submission of the author’s expert report), although (1) a Motion for Reconsideration was filed by the plaintiff well before the August 28, 2020 final, lengthy trial court ruling was released, and (2) a directive was given by the trial court judge after reviewing the author’s expert report to the effect that the author’s deposition was to be taken well before the August 28, 2020 final lengthy trial court ruling was released.
In an attempt to sway the trial court judge, the plaintiff attorney requested that the author carefully review the lengthy two volume deposition of Cutruzzula, which referenced numerous items that could have been easily and quickly uncovered by the insurer had it conducted promptly a balanced investigation as opposed to a one-sided investigation. The author identified numerous contradictions in the testimony of Cutruzzula, all of which were presented in the author’s lengthy expert report, the purpose of which was to document the indisputable fact that Cutruzzula was the real thief as opposed to Coca, Newton, etc. For example, Cutruzzula gave contradicting testimony concerning his rental of a storage facility located in upstate New York from Steven Daley, at which Newton’s excavator was stored until a prospective buyer (Jean-Louis Vorburger) was identified. Cutruzzula testified in his deposition that he did not know Jean-Louis Vorburger, the buyer of Newton’s stolen excavator, but Jean-Louis Vorburger identified Cutruzzula’s photograph in a lineup that was shown to him by the Pennsylvania State Police, who conducted an exhaustive and thorough investigation concerning Newton’s stolen excavator.
Certainly, most IRM cases in litigation contain some “bad facts” that a testifying expert must overcome; in the complete absence of “bad facts”, most likely, the IRM case would not be in litigation, meaning that the insurer promptly investigated the facts and circumstances pertaining to the claim, and paid the correct amount under the terms of the policy. Settlements, however, can be obtained in well less than perfect cases from the standpoint of the plaintiff. Such is the case because all that is required to preclude the court from granting an insurer’s Motion for Summary Judgment is the creation of a factual issue by the testifying expert. Indeed, both the plaintiff attorney, and the author were confident that the trial court judge would grant the plaintiff’s Motion for Reconsideration, and deny the insurer’s Motion for Summary Judgment, based on the fact that the trial court judge had previously recommended that the case be submitted for mediation, well before the author was retained as a testifying expert in this case by the plaintiff.
Applying an Inland Marine Policy to an Excavator Theft Claim Consistent With the Intent of the Parties to the Contract: In applying the Commercial Inland Marine policy to Newton’s excavator theft claim, the insurer must consider not only a strict reading of the policy language, but also whether the property exposure (potential loss to the excavator) is covered under a property insurance policy or an inland marine insurance policy. Given that Newton procured a policy prominently labeled as a “Commercial Inland Marine Policy,” the intent of both the insurer and Newton was to insure the excavator under an inland marine policy as opposed to a property policy. Most importantly, the custom and practice is to include coverage features in an inland marine policy, all of which can be traced to coverage features historically included in ocean marine policies, that typically are not included in a property policy. The “roots” of inland marine insurance can be traced to ocean marine insurance, meaning that inland marine insurance evolved from ocean marine insurance. For a detailed discussion of this evolution, and an identification of these unique coverage features, see Warfel, William J. and Asperger, Jeff, “Builders Risk: Inland Marine Insurance or Property Insurance?”, The John Liner Review, Winter 2008, pp. 51-65.
In the illustrative teaching case, the insurer failed to consider these coverage features in applying the applicable Commercial Inland Marine Policy to Newton’s excavator theft claim and, therefore, made several wrongful coverage determinations in its April 24, 2017 final claim denial letter addressed to Newton.
First, for coverage to be invoked under the Commercial Inland Marine policy, the theft of the excavator must be deemed a “loss,” as defined under the terms of the policy. “‘Loss’ means accidental loss ….” In the final claim denial letter, the insurer contended that “the unexplained disappearance of the subject equipment [the excavator] was neither accidental ….” Notwithstanding the fact that the disappearance of the excavator was not an “unexplained disappearance” (i.e., Cutruzzula transported the excavator from the yard owned by his grandfather in New Jersey to a storage shed in upstate New York, from which it was sold to an unsuspecting third party for $18,000, meaning that the removal of the excavator by Cutruzzula from the yard located in New Jersey owned by his grandfather was clearly “accidental”, as opposed to intentional, from the perspective of Newton (the insured)). Inland marine insurance policies customarily provide broad coverage, and exclude only uninsurable exposures to loss. For an exposure to loss to be insurable, loss must be accidental from the standpoint of the insured (Newton). Had the insurer conducted a prompt, balanced investigation shortly after Newton submitted the excavator theft claim to the insurer on September 13, 2016, including, most importantly, taking statements from both Newton and Cutruzzula and Ferretti, it would have learned details concerning the long-term business and personal relationship between Newton and Cutruzzula. Newton and Cutruzzula had engaged in business on prior occasions before the theft of the excavator, meaning that Cutruzzula had previously transported equipment owned by Newton to various job sites on a regular basis over the years without incident. Moreover, Newton had “run in the same circle” of friends with Cutruzzula’s brother while he was in high school, meaning that Newton implicitly trusted Cutruzzula. Such being the case, the coverage determination by the insurer that Newton expected Cutruzzula to take unlawful possession of the excavator was unreasonable, and constitutes bad faith.
Second, in contending that the “subject equipment [the excavator] [was located at] 288 Patterson Plank Road, East Rutherford, New Jersey 07073 on or about August 13, 2016 [the date Newton’s excavator disappeared from the yard owed by Cutruzzula’s grandfather], which is not property owned by you [Newton] ….”, the insurer failed to consider the fact that an inland marine policy, as opposed to a property policy, usually provides coverage for property exposures that are mobile in nature. Property insurance policies, as opposed to inland marine insurance policies, usually restrict coverage to a fixed location (i.e., the location owned by the insured, Newton’s yard located several miles from the yard owned by Cutruzzula’s grandfather). While property insurance policies may include very limited coverage for property that is mobile in nature (Newton’s excavator) while it is located off-premises, Newton elected to insure his excavator under a Commercial Inland Marine policy because he knew that the excavator was mobile in nature, meaning he knew that the excavator would be he would be frequently transported from one job site to another job site. For this reason, Newton elected not to insure his excavator under a property insurance policy that largely restricted coverage to a fixed location identified in the Declarations (Newton’s yard, located several miles from the grandfather’s yard). In applying the Commercial Inland Marine policy to Newton’s excavator theft claim in a way that restricted coverage to a fixed location, the insurer unreasonably denied a policy benefit, and acted in bad faith in its processing of Newton’s excavator theft claim.
Third, in contending that “we [the insurer] cover: your [Newton’s] contractor’s equipment [Newton’s excavator] … that is in your [Newton’s] care, custody or control … for up to the Limit of Insurance [$85,000] shown on the Declarations,” the insurer referenced the fact that the excavator was located in the yard owned by Cutruzzula’s grandfather at the time it was stolen, meaning that the excavator was in the care, custody, and control of Mario Mariano (Cutruzzula’s grandfather) and/or Cutruzzula on the date of loss. The record confirms that Newton acquired ownership of the excavator on June 25, 2016, well before the date of loss. The Bill of Sale was signed by both Newton and Coca (the previous owner of the excavator) on June 25, 2016. From the moment Newton acquired ownership of the excavator on June 25, 2016, he began to exercise control over the excavator. Newton arranged for Cutruzzula to transport the excavator from Long Island, New York to New Jersey. Newton agreed to have his newly acquired excavator delivered to the yard owned by Cutruzzula’s grandfather. In short, the insurer unreasonably denied a policy benefit in processing Newton’s excavator theft claim, and acted in bad faith in doing so.
In concluding that the insurer had conducted an adequate investigation, reasoning that it was only required to schedule and take Newton’s EUO, the trial court judge relied substantially on the “bad facts” cited in the trial court ruling, including, most importantly, the details concerning Newton’s acquisition of the excavator (i.e., Newton received a credit for recovery of the excavator that was unlawfully removed from Coca’s premises). In so doing, the trial court judge ignored the fact that Newton was truthful and accurate in his partially completed EUO concerning the details related to his lawful acquisition of the excavator from Coca, as evidenced by an Affidavit supplied by Coca in this litigation, confirming the details related to the acquisition of the excavator, to which Newton testified in his partially completed EUO. Moreover, the trial court judge ignored the documentation confirming Newton’s EUO testimony such as the Bill of Sale, documentation which the insurer could have easily obtained early in its investigation of Newton’s excavator theft claim, well before Newton’s scheduled EUO. In ruling that a one-sided investigation designed solely to uncover data suggesting that Newton was in financial distress, and had a motive to submit a fraudulent excavator theft claim, was sufficient to negate a bad faith allegation by Newton, the trial court judge ignored the fact that a balanced investigation would have uncovered data confirming that Cutruzzula had unlawfully (1) removed the excavator from the yard owned by Cutruzzula’s grandfather, and (2) transported it to a storage shed in upstate New York, and sold it to an unsuspecting third party.
While the trial court judge recognized the fact that insurers have limited resources for the purpose of conducting investigations, the trial court judge failed to recognize the fact that policyholders like Newton procure broad form theft coverage under a Commercial Inland Marine policy so that funds received from a prompt insurance settlement are available to the policyholder to continue operations until the stolen equipment is located and recovered by the police. Oftentimes, it takes up to a year following an equipment theft incident before the police finally receive a “tip” eventually leading to the recovery of the stolen equipment. In the absence of prompt payment to the insured under a Reservation of Rights letter, the policyholder cannot quickly replace the stolen equipment and resume operations, which could result in the closure of the policyholder’s business.
The Recovered Property condition contained in an inland marine policy presumes that (1) equipment is stolen by a third party, (2) the policyholder reports the equipment theft promptly to the police, followed shortly thereafter by the submission of an equipment theft claim to the insurer, (3) the insurer promptly commences a balanced investigation as opposed to a one-sided investigation, followed by payment of the equipment theft claim under a Reservation of Rights letter shortly thereafter, (4) the police locate and recover the stolen equipment, usually within one year from the date that the equipment theft was reported by the policyholder to the police, and (5) the policyholder opts to receive the stolen equipment upon its recovery by the police from the wrongdoer, with the policyholder reimbursing the insurer for the difference between the settlement amount, and the recovery costs incurred by the policyholder. The condition precedent (a prior settlement), however, is not met if (1) the insurer fails to conduct a balanced investigation, unreasonably concluding that the policyholder submitted a fraudulent equipment theft claim, and/or (2) the insurer makes wrongful coverage determinations, failing to distinguish between an inland marine policy and a property policy. For this reason, a strict reading of the Recovered Property condition in this illustrative teaching case was at odds with the intent of the parties to the contract, and the reasonable expectations of the insured.
Prof. William J. Warfel, PhD, CPCU, CLU, specializes in Insurance Breach of Contract, Bad faith, and Agent / Broker Liability issues. He has been retained in 90 cases by attorneys who represent policyholders, insurance agents, insurers, and third parties. Dr. Warfel is widely published in applied, professional journals. His experience includes actual courtroom testimony, as well as deposition testimony in numerous cases.
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