New York Business Lawyer Blog

Technology is not the only thing you need to investigate insurance fraud. Technology might tell you who to question, but someone still has to do the questioning. Analysis of big data might give you a lot to talk about, but someone, preferably with a little training and experience, is going to have to have that conversation. Technology might be able to sort through a tremendous amount of otherwise indecipherable data in order to identify, or obtain, clues about possible fraud. No matter how good the technology, no matter how vast the meta-data, no matter how many computers parse the data, a skilled investigator still has to connect the dots, and, eventually, a lawyer still has to convince a jury that those dots create a clear, unmistakable picture of fraud.

The interview, where one real person talks to another, is necessary in all fact-finding, whether it be a fraud investigation, a deposition in litigation, or a criminal prosecution. How to obtain information from people, however, is an art, not a science. There might be rules to follow and methods to learn but, by themselves, they are not enough.

An article in the June 1-2, 2013 Weekend Edition of the Wall Street Journal points out the art, and skill, involved in obtaining information from people who may be reluctant to provide it. The author, Jason Matthews, is an ex-CIA agent with more than 30 years of experience, who worked in what now is known as the National Clandestine Service. He talks about what it takes to convince people to spy against their own country. The key, he argues, is to find out what motivates a person. He describes four basic motivational factors, common to all people, that he used. Known by the acronym MICE, they are: money, ideology, conscience, and ego. According to the author:

Money is the most straightforward motivational factor. It's a business deal: the spy gives you useful information, you give him money. Greed may not be good, but it evidently can get you what you want.

Ideology, or the sudden loss of it, is the most potent factor of all, according to Matthews. The example he uses to prove his point, however, really proves another: sometimes, the most motivated person is the one driven by revenge against someone they trusted who hurt them or their family. Matthews describes one of the best assets in CIA history, Dmitri Polyakov. He was a Soviet military officer stationed in the United States, whose son became fatally ill. Moscow refused to allow his son to be treated by an American doctor. He became one of the best spies in CIA history. Simple.

The most potentially dangerous, is the spy motivated by conscience, especially if he is out to save, or to atone for the sins of, the world. In many ways this could describe the NSA leaker, Edward Snowden. If you read his coming out story in the Guardian newspaper, he justifies his leaks by claiming the American public must be told of the NSA's programs because they simply have gotten too big, with too much room for abuse. He describes how he is a champion of internet freedom and does not want to live in a world in which there is no privacy, where the government knows your every move. He doesn't seem to have been motivated by money since he reportedly earned $200,000 per year as a defense analyst and, as he pointed out, did not sell his secrets. He seemingly wasn't motivated by ego, either, since, according to the Guardian's reports, he was a former staffer for the CIA and had a fairly important job with a contractor within the NSA. In other words, he leaked classified information to atone, in his mind, for what he alleges are the sins of his government.

Ego is a tricky tool to use. If a normally meek person has his ego properly stroked, he'll overcome his fears to provide what he is made to believe is crucial information. Once convinced that he's important, that people depend on him, however, he'll always need to be re-assured.

Importantly, blackmailing potential agents, threatening to expose their sexual or other misconduct, doesn't work too well. The agent you get will be unreliable, and the information he gives won't be much better.

What makes the article interesting is that most everyone likes a good spy novel, and sometimes real life is stranger, and better than, fiction. Learning about how the spy world operates always is intriguing, and enlightening.

What makes the article useful is that it demonstrates some of what goes into the art of persuasion. The same thing does not work with everyone; scripts are no good. You have to pay attention to the person. In many ways it's more difficult to read a person than to read a book, and it requires a lot more thought and experience. In many ways, though, it's the same; the true meaning isn't just in what the words say.

An average person, who, right or wrong, feels stuck in the rut of his everyday life, may jump at the chance to tell what he knows about the accident he witnessed, especially when he finds out that five people claimed they were hurt while in the car in which he saw only two people. The single mother, trying to make ends meet in her low-paying job at the local clinic, may be able to put up with the lies and the cheating; she won't risk her children's welfare just to stop fraudulent billing. She will, however, reluctantly tell what she knows in order to make sure that no one else gets hurt by being put under for a medical procedure they didn't even need. Even the arsonist will tell you, if you'll only understand, that he really thought he could put out the fire, he wanted to be the hero, except that the fire just spread too fast.

The author, Jason Matthews, says that a bond of trust needs to be established. In a way he's right. There has to be a reason the witness wants to give you the information; often you can see it, staring right there at you. It doesn't have to be anything big; nothing grand. You can hear it, if you listen; it may be faint, but it's there. Every person has a different story to tell and a different reason for telling it. You'll never know what it is unless you listen. Listening and trust often go together; maybe they are even the same thing. One thing seems pretty certain, though: you can't have one without the other; and that is a good lesson for every interviewer to learn.

There has been a lot of discussion recently about the advantages of technology when it comes to fighting fraud in general and insurance fraud in particular. The analysis of large amounts of digital information in a relatively short time can lead to better, more informed, decisions by businesses large and small, and provide a better means to ascertain, and prevent, fraudulent behavior. The increased use of digital information leaves a bigger trail. Social media, emails, digital photos, all leave noticeable footprints with more information than the creator may know, or may have intended. It can be used to track fraud, but it also can be used to track the tracker.

There were two recently published articles that relate to this problem; one from a business, and one from a scientific, point of view.

The first article, published in the June 1-2 Weekend Edition of the Wall Street Journal and written by Justin Baer, William Launder, and Matthias Rieker, concerned the dispute Goldman Sachs Group Inc. and J.P. Morgan Chase & Co., have had with Bloomberg LP over the sharing of customer data. Both Goldman Sachs and J.P. Morgan Chase subscribe to Bloomberg's financial terminals, found on trading floors, which provide real-time financial data and analytical tools, as well as news and a messaging function that allows traders to chat in real-time with other traders logged onto the terminals. According to the article, Bloomberg allowed reporters in its news division to access the subscriber usage data for the terminals, which let them see which individual subscribers were logged on at any given time, when a subscriber was last logged on, and how often he accessed certain functions. The Bloomberg reporters used this customer data as a basis to question Goldman Sachs and J.P. Morgan Chase on major news events regarding each. For example, in 2012, J.P. Morgan Chase suffered big trading losses in its London office. Bloomberg reporters used the fact that some employees involved in the losses had not logged on to the Bloomberg terminals, as a basis to question J.P. Morgan about whether those employees had left the company. Similarly, a Bloomberg reporter called Goldman Sachs' Hong Kong Office this past April to ask about a partner at the firm that had not recently logged on to the Bloomberg Terminal. As a result of the disputes, J.P. Morgan reportedly removed some of the data terminals from its trading floors, though Goldman Sachs has not done so.

The second article, published on May 30, 2013 by the University of Pittsburgh, entitled "When Friends Create Enemies," concerned a study led by James Joshi, an associate professor of information security and assurance in University of Pittsburgh's School of Information Sciences, which was published in the journal Computers and Security. It showed that, for users of social networking sites such as Facebook, information they intend to keep private, can still be accessed through other, publicly available information. Even when a user has tried to protect certain information from public view, such as by making the identities of her friends private, a hacker still can obtain that information; all that is needed is the ability to identify mutual friends. Common to social networks such as Facebook or Linked In, the mutual-friends feature encourages, and facilitates, a user to expand her network of friends by allowing her to search for mutual friends among those she already is connected to. Using just the mutual-friends feature, the study's authors were able to identify 60% of a user's private friends. Being able to see a user's mutual friends, according to the authors, could allow someone to determine the user's political affiliation or obtain socially embarrassing information; when combined with other background information, it could allow someone to create a fake identity that is, in many ways, more realistic than the person whose identity was stolen. Importantly, the study's authors used a Facebook data set, of more than 63,000 users with more than one million friends, that was publicly available.

Whether you are a multinational financial institution, a Facebook user, or an insurance company, it is hard to ensure that all of your information is truly as safe as you think. Data breaches are hard to guard against. There are privacy laws, laws against hacking, and even laws against hacking-back, but they are not always enough. Businesses and individuals have to be aware of the digital footprint we all leave behind and remember that, to a very large extent, they are responsible for ensuring the privacy of their information; if they do not want to make information public then they should take reasonable steps to make, and keep, that information private. Once public, the information will always be there, to be seen, and used, by any and all who just think to look for it. It is hard to un-ring a bell.

The amount of readily available public information is large enough, in both scope and quantity, to aid fraud investigations if used in the right way. Simple pieces of information can answer important questions. Look at what usage data allowed the Bloomberg reporters to surmise and then confirm. Look at the information the researchers in the Facebook study were able to determine; and always remember that they used publicly available information to conduct their study. Public information can tell you much about whether and how fraud was committed and technology does make this public information more accessible. Technology will prove more beneficial than not to fraud investigators as long as they remember this and the limits on such investigations.

In our last article, we began a discussion about insurance fraud. It comes in many shapes and sizes, infects many different types of claims, and is hard to eradicate. Like the Hydra of Greek mythology, every time you prevent a fraudulent claim from being paid, many more raise their ugly heads.

The extent of the problem is illustrated by the complex fraud rings that have made the news recently. A multi-year, multi-agency investigation, named Operation Sledgehammer, in Dade and Palm Beach counties in Florida, just led to the arrests of 26 people in an insurance fraud ring. The defendants allegedly staged accidents to collect personal injury protection benefits which would be split among the recruiters, those allegedly injured, the medical professionals who allegedly treated them, and the owners of the clinics where they were treated. According to news reports, those arrested were charged with having billed more than $20 million to insurance companies in the scheme. Earlier this month, Allstate Insurance Company filed its third insurance fraud lawsuit of 2013. This one, filed in the United States District Court for the Eastern District of New York, seeks to recover $3.8 million from five medical professional corporations and six physicians for allegedly fraudulent medical billing related to no-fault claims. It alleges that the defendants submitted bills for examinations and testing that were not performed, not necessary, or not designed to benefit the patients who allegedly were treated.

In order to fight insurance fraud, insurers need to be as flexible and adaptable as the perpetrators. One way to do this is through the effective use of the vast amounts of information already within the carrier's control.

The term "Big Data" has been used a lot recently, within both the scientific and business communities. It's defined as a huge amount of digital information, so big and complex that normal database technology cannot process it. Computers can handle large amounts of information, much more than any single person could analyze; Big Data is many times bigger. Think of the well-publicized human genome project, in which scientists mapped human DNA. They first had to identify each piece of information before they could try to figure out what each part is used for and how it affects the others. Or consider the case of retailers who now analyze customer data to decide on the types and amounts of inventory they need to stock and the price points or sales they need to run in order to sell it. They need to gather, and integrate, the data regarding their customers from myriad sources, before they can analyze and make intelligent decisions based on it.

Identifying information is hard enough, even if you already have it. Figuring out what each piece of information means can be daunting, especially when there are so many to sift through. There is a lot of information to work with: Of all the data that currently exists in the world, 90% has been created in the last two years. How that data can be, and is, used is the key.

Insurance carriers have a lot of information at their disposal. How many claims does a large insurer handle a year and how much information is gathered on each? Should that information be kept isolated, or should it be integrated to help make intelligent decisions about fraud investigations?

A September, 2012 study, entitled "The State of Insurance Fraud Technology," which was conducted by the Coalition Against Insurance Fraud, with technical assistance from SAS Institute, found that most insurers now use technology to assist them in determining which claims to investigate:

When it comes to technology, most insurers' anti-fraud efforts begin with rules-based systems. These systems test and score each claim against a predefined set of business rules and report the results to the SIU teams that look suspicious due to their aggregate scores or relation to threshold value.

Continue reading "WHAT CAN BE DONE TO FIGHT INSURANCE FRAUD? THE USE OF TECHNOLOGY" »

Insurance fraud is a widespread problem, in New York, throughout the United States, and around the world. It involves many different types of insurance claims. Insurance fraud can be found in first-party claims, where the insured is seeking to recover more than he otherwise would be entitled to under his own policy, be it a homeowner's, business owner's or other commercial lines policy, or an automobile policy. It also can be found in third-party claims, where claimants seek to recover from the insured's liability carrier for loss or damage that did not occur, which the insured did not cause, or for exaggerated or pre-existing damage or injuries. Its impact is well known: Insurance carriers incur higher costs, including expenses to investigate and defend against fraudulent claims, higher claims payments and lower premium income. The Coalition Against Insurance Fraud estimates that insurance fraud schemes steal approximately $80 billion a year. Policyholders are forced to subsidize, through higher premium payments, the claimants who collect on fraudulent and/or exaggerated claims. The National Crimes Bureau estimates that insurance fraud adds $200-$300 per year to an individual's insurance premium. The fraud is attempted through everything from complex schemes to mundane lies. What makes it important is not so much how it's done, but its prevalence.

Sometimes the insurance fraud schemes are ingenious. In March 2013 an upstate New York man was arrested because he was found in possession of a tilt bed truck and vehicle identification number, both of which were stolen. Even though he was caught and arrested, the man still could be considered clever: The truck he was found with actually was built from two other, stolen trucks.

Sometimes the insurance fraud schemes are mundane. In March 2013 an Oneida County, New York, man was arrested for insurance fraud. He made a claim under his homeowner's policy with Liberty Mutual Insurance Company to recover $11,779 for water damage to his residence, and submitted a sworn statement in proof of loss in support of the claim. It turned out, however, that there was substantial evidence that the water damage he tried to recover for was actually pre-existing damage; it was there before the date of the claimed loss. As it turns out, that was neither clever nor effective.

Sometimes the insurance fraud schemes are brazen. A Nassau County, New York, woman recently was arrested for insurance fraud in the 3rd degree and for offering a false written statement. She filed a homeowner's claim to recover for fire damage to her house. Hartford Insurance Company issued a check, for $33,596, to pay the claim. The check, however, was made payable to the woman's ex-husband, who still was the named insured on the policy. The woman notified Hartford that she did not receive the check, so it sent her a duplicate, which, like the first, named her ex-husband as the payee. An investigation turned up evidence that the homeowner received both checks, gave each to her son who, because he had the same name as his father, the woman's ex-husband, was able to deposit each into his personal account. The woman then was able to withdraw the funds from her son's bank account using an ATM card. For the same reason, it was both clever, since the right name was endorsed on the two checks, and not well-thought out, since there were two checks on which the right name was endorsed and a clear record that each had been cashed.

Sometimes the fraud schemes simply do not add up. A man was arrested in March 2013 for falsely reporting that his 2008 Honda had been stolen. He claimed that he last saw the car when he parked it on a Queens, New York, street at approximately 0120 hours on February 8, 2013, and that he had all the keys to it. The Mount Vernon, New York, police, however, recovered the car, after it already had been burned, more than a full day before the man claimed he last saw it.

As insurance fraud continues to proliferate, involving disparate claims, means, and methods of execution, carriers' tools also need to expand. A good example is the use of "Big Data," i.e., the large amount of information, in digital form, readily available to insurers on their vast number of claims. Using it, rather than ignoring it, has the potential to lead to more well-informed decisions on who, what, and how to investigate a potentially fraudulent claim. Combined with the intuitive judgements and experiences of their SIU representatives, the use of Big Data through tools like text mining, has the potential to enhance carrier's anti-fraud efforts, which will be to everyone's benefit. The use of Big Data will be the subject of subsequent articles.

When an insurance company provides liability coverage, in New York or elsewhere, it most often provides an attorney to defend its insured against lawsuits for risks covered under the policy it issued. This is true whether the insured is covered by an automobile policy, homeowner's policy, business-owner's or BOP policy, or title insurance policy; if the allegations against the insured are covered by the policy, the insurer will retain counsel to defend the insured against those same claims. The attorney can be in-house counsel or outside counsel retained by the insurance company on a case by case basis. Who this counsel, often called "retained counsel" or "assigned counsel" represents, may surprise you. The answer is something every carrier, claims adjuster, and policyholder in New York should remember: The insured. In assigning counsel to defend an insured, the insurance company should be careful to select one that knows, and follows, this rule.

The case law in New York is clear. The Court of Appeals, in Feliberty v. Damon, 72 N.Y.2d 112, 120, 527 N.E.2d 261, 265 (1988), stated it best:

First, the duty to defend an insured is by its very nature delegable, as all the parties must know from the outset, for in New York--as in California--an insurance company is in fact prohibited from the practice of law (Judiciary Law § 495). Accordingly, the insurer necessarily must rely on independent counsel to conduct the litigation. Second, the paramount interest independent counsel represents is that of the insured, not the insurer. The insurer is precluded from interference with counsel's independent professional judgments in the conduct of the litigation on behalf of its client (Trieber v. Hopson, 27 A.D.2d 151, 153, 277 N.Y.S.2d 241; American Employers Ins. Co. v. Goble Aircraft Specialties, 205 Misc. 1066, 1075, 131 N.Y.S.2d 393; see also, Code of Professional Responsibility EC 5-17, 5-21, 5-23).

[Emphasis supplied]

See also Fed. Ins. Co. v. N. Am. Specialty Ins. Co., 47 A.D.3d 52, 59-60, 847 N.Y.S.2d 7, 12 (1st Dept. 2007)[Assigned counsel's duty is to insured and where there is a conflict between insured and insurer, it cannot represent both].

There is more, however, than just case law. The ethical rules with which all New York attorneys must comply, say the same thing: Retained defense counsel has one client, the insured, not the insurance company. That the insurance company pays the legal fees for the defense is unimportant; the key is who the lawyer is defending. Rule of Professional Conduct 5.4 (c) states that retained counsel cannot let the insurance company interfere with his representation of the insured/defendant:

Rule 5.4: Professional independence of a lawyer. * * * (c) Unless authorized by law, a lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal service for another to direct or regulate the lawyer's professional judgment in rendering such legal services or to cause the lawyer to compromise the lawyer's duty to maintain the confidential information of the client under Rule 1.6.

The most important lesson to take from this is that the retained defense counsel owes its duty of loyalty to the insured and, once it has been retained to represent the insured, it cannot help the insurance company decide coverage issues involving the same insured.

Whether the insurer owes the insured a defense and/or indemnification against the particular allegations involved in a given case, is something that the carrier should decide before it retains defense counsel. Often, if there is any doubt, the insurer will issue a reservation of rights letter to the insured before defending him, outlining the possible coverage defenses which may later be found to apply. Many times, facts will be developed which will show that those coverage defenses do apply, such as when the allegations in the complaint are clarified through discovery to show that they do not fall within the risks covered by the terms of the insured's policy. When the carrier needs to make a decision as to whether or not to continue to defend and/or indemnify the insured, however, it should not look to retained defense counsel for any guidance, and that retained defense counsel should refrain from offering any. Instead, the carrier should refer coverage questions to coverage counsel; i.e., other counsel who can represent the insurer's interests in the matter without conflict.

Whenever an attorney is retained by a carrier, he has to be certain in what capacity he has been retained, and be careful to stay within that role. If the insurer has assigned him to defend the insured, then his client is the insured, and he cannot provide coverage analysis of the terms of the insurance policy pursuant to which he has been retained, because to do so would be to the possible detriment of his client. Retained defense counsel should continue to defend the insured in the underlying claim to the best of his ability unless and until a court allows him to withdraw and he cannot argue issues of coverage in requesting to withdraw. To do anything less would be a disservice to the insured and the insurance company.

At the same time, the insurance company's adjuster handling the claim should not want retained defense counsel's coverage opinion; it only will jeopardize whatever coverage determination the adjuster ultimately makes by opening it up to collateral attack. The adjuster's determination will be on much more solid ground if he obtains a coverage opinion from separate, coverage counsel, retained specifically for that purpose.

This does not mean that an attorney, or a firm, can be retained only to defend insureds or retained only as coverage counsel. They can do both, just most often not for the same insured, and definitely not on the same claim, as long as there is no conflict. Knowing the difference between the two roles benefits everyone. Every adjuster should keep this in mind when assigning and retaining counsel; it will do much to ensure a successful outcome of the case, and that, after all, is the goal.

We are going to pick up where we left off in our last article on subrogation in New York. We were talking about a subrogation case I had that showed how to overcome an exculpatory clause in a contract that absolved one of the parties from liability for its own negligence. In my case, it was an alarm company that monitored a warehouse that had a break-in in which clothes valued at several hundred thousand dollars were stolen. If the alarm company's actions in responding to the alarms at the warehouse amounted to ordinary negligence, the subrogation action would fail because the insured, who signed the contract, could not recover, and therefore neither could the insurer. There could be a recovery, however, if the alarm company's actions amounted to gross negligence because, at least in New York, a party cannot absolve itself from liability for its own gross negligence. See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554, 593 N.E.2d 1365, 1370-71 (1992).

According to the court, the basic facts were undisputed. The alarm company received alarms that something had happened at the warehouse, and notified the police and the designated representative of the business, as it was supposed to do. The police never arrived. The warehouse representative was told only that the alarms had been received. He thought they might be false alarms, as had happened in the past, and waited approximately a half hour for the alarm company guard to get to the warehouse, investigate, and call him back to let him know whether there had been an actual break in. When he did not get a call back, he went to bed. The alarm company, however, waited until the next shift, approximately three hours after it received the alarms, to have one of its guards respond to the warehouse to investigate, and it never told anyone from the warehouse that it would not be able to respond for so long; both were violations of its own guidelines. It also only had only a small number of guards on duty to respond to calls in a very large, populated area. In order to enter the warehouse the guards first had to travel back to the central station, get the key for the warehouse, and then drive a long distance back to the warehouse. Only then would they be able to investigate the alarms.

The key was not any one thing that the alarm company did wrong with this particular break in. The fact that it waited three hours to have a guard investigate the alarm, when it stated the guard would respond in 15 minutes, was not, by itself, gross negligence. Instead, I argued the evidence of gross negligence was found in a system that inevitably caused such delays: The evidence of the low number of guards on duty; the large area they had to cover; the long distance from the guard station to the warehouse that made it difficult even on a good night to make it to the warehouse in time; and the violation of its own guidelines. This was evidence of the gross disregard for the rights of others, of actions that smack of intentional wrongdoing, which is required to get to trial on claims of gross negligence.

Continue reading "Subrogation In New York V - Teamwork In Action " »

The last few articles have discussed the basic concepts and rules of subrogation in New York. It is the equitable doctrine that allows an insurer that pays a covered claim to its own insured to stand in the shoes of its insured to recover the money from the person or entity that caused the loss.

Subrogation, once you determine that the insurer can bring the claim, at least in claims involving property loss or damage to businesses, is really an exercise in commercial litigation. Whoever the insured could sue to recover for the loss it suffered, the insurance carrier also could sue; whoever the insured could not sue, the insurer also could not sue.

A good example of this is a subrogation claim I had that involved a theft of a few hundred thousand dollars of merchandise from a clothing warehouse. The thieves, who never were caught, were ingenious. They broke into the warehouse and jerry-rigged a conveyor system so that it brought the clothes right to the loading dock door. Once there, the thieves loaded the clothes into a waiting truck and drove off. The whole operation took approximately 2 hours; not bad for a night's work.

The warehouse, which had its own policy of property insurance, made a claim to recover for the value of the clothes, which its insurer paid because theft was a covered cause of loss under the policy. The insurance company then wanted to try to recover the money it paid the insured, from the parties responsible for the loss.

There was nothing that barred the insurance company from bringing a subrogation claim. The loss clearly was covered under the warehouse's own policy of insurance, which protected against losses caused by theft; the insurance company had to pay, it did not make a voluntary payment. The thieves were never found, so they could not be sued. The warehouse, however, had a central station alarm, and there was nothing in the alarm contract that barred a subrogation claim. There was a big obstacle, however, preventing the warehouse from recovering from the alarm company even if the alarm company's actions had caused the loss; and, if the warehouse could not recover, neither could the warehouse's insurer in subrogation. The alarm contract contained an exculpatory clause absolving the alarm company from liability for its own negligence. Unless the alarm company's actions amounted to more than ordinary negligence, there would be no recovery against it.

One way to overcome an exculpatory clause in a contract which absolves a party from liability for its own negligence, is to prove gross negligence. Gross negligence is the failure to use even slight care, or conduct that is so careless as to show complete disregard for the rights and safety of others; it smacks of intentional wrongdoing. At least in New York, a party cannot absolve itself from liability for its own gross negligence and, most often, whether a party's actions amount to gross negligence is an issue of fact to be tried by a jury rather than determined on a motion for summary judgement. See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 554, 593 N.E.2d 1365, 1370-71 (1992).

The insured, its representatives, and I worked as a team to obtain evidence that the alarm company was grossly negligent in how it responded to the alarms at the warehouse. The court said this was enough to defeat the alarm company's motion for summary judgement. We'll show how this was done, in our next article.

The last two articles discussed the rules behind the equitable doctrine of subrogation in New York and how they all boil down to an application of the basic idea of fairness. Someone who damages another's property should not be able to avoid liability merely because he was lucky enough to harm a business or person who had the foresight to purchase an insurance policy that fully insured, and reimbursed the insured for, the loss. Subrogation, in effect, holds the wrongdoer to account. Even if the insurer has paid the insured for the property loss, the wrongdoer still has to pay the insurer.

Subrogation claims come in all shapes and sizes, at least for commercial insurance policies which protect against property damage and business interruption. Recently, Lloyd's of London made the news by bringing a subrogation action against a New Hampshire utility to recover the money it paid its insured as a result of a fire. According to news reports, a fire engulfed a block of businesses in Hampton Beach, New Hampshire, in February 2010. One of those stores, Decalomania, was insured by Lloyd's of London. The water used to put out the fire allegedly damaged Decalomania's property and, pursuant to the policy of insurance it issued to Decalomania, Lloyd's of London paid Decalomania $33,000.00 as reimbursement for that property damage. Lloyd's of London has brought suit against the local electrical utility, Unitil, to recover the $33,000.00 it paid Decalomania. It alleges that the fire started due to a fault in an electrical feeder line owned by Unitil and that Unitil failed to use reasonable care when maintaining the line, which was under its exclusive control.

Whether or not Lloyd's of London will be successful in recovering, from Unitil, any of the $33,000.00 it paid to Decalomania, will depend on a number of factors. If the subrogation action had been brought in New York, rather than New Hampshire, Unitil first would be able to challenge whether the policy required Lloyd's of London to pay Decalomania for the loss. If the policy did not provide coverage for Decalomania for the loss, then Lloyd's of London made a voluntary payment for which it could not maintain a subrogation action. See Fid. & Cas. Co. of N.Y. v. Finch, 3 A.D.2d 141, 145, 159 N.Y.S.2d 391, 396 (3rd Dept. 1957).

Continue reading "SUBROGATION III - RECOVERING FOR PROPERTY DAMAGE CLAIMS IN NEW YORK " »

In our last article, we discussed subrogation, a legal concept that plays a large role in commercial property insurance coverage in New York. It is the equitable doctrine that allows an insurer, once it has paid its insured for a covered loss under its insurance policy, to try to recoup the money it paid from the party that caused the loss.

Once an insurer pays its insured for a covered loss, it stands in the insured's shoes, at least up to the amount of the payment. If the insured can sue someone for causing the loss, so, too, can the insurer, to try to get its money back. The insurer does not even always have to name itself in the subrogation action. If the insured properly assigns its rights to recover for the loss to the insurer, for example by signing a subrogation receipt, the insurer can name the insured as the only Plaintiff, even though the real party in interest is the insurer. See CPLR 1004.

When the insurer tries to recover its money, it does not do it alone; the insured has a duty under the policy to cooperate with the subrogation action. Basically, the money the insured receives for the loss from the insurer comes with strings attached; the insured has to try to help the insurer get its money back from the party that has caused the loss. Most policies, however, allow the insured to waive subrogation, as long as the agreement to do so is in place before the loss occurs. This means the insured can waive the right of its insurer, which pays it for a covered loss, to recover in subrogation from the party which has caused the loss. A common example is found in a lease, in which the tenant and the landlord each give up the right of its insurer to recover from the other for a covered loss, such as a fire loss, that it might suffer due to the negligence of the other. See Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654, 660, 687 N.E.2d 1330, 1332-33 (1997).

Continue reading "SUBROGATION II - The Just Details" »

There are many terms, related both to insurance and business, which seem too intimidating for most people even to want to try to understand. Subrogation is one such term. It sounds like an impressively dense legal concept that only can be understood through the use of skilled professionals pouring over thick stacks of documents trying to decipher obtuse language to discern some hidden meaning or obtain some pearl of wisdom. Well, so much for fantasy. It really is a straightforward legal concept that every New York business and insurance adjuster should become familiar with, because it can affect the business' recovery after a property or casualty loss.

Subrogation is an equitable doctrine that allows an insurer, which has paid its insured for a covered loss, to stand in the shoes of its insured to try to recover the money it paid, from the party that caused the loss in the first place. See Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654, 660, 687 N.E.2d 1330, 1332-33 (1997).

The easiest way to think of subrogation is in terms of an insurance policy that provides coverage for property damage. Just about every New York business has one. For the most part, every insurance policy protects the insured, to one degree or another, from responsibility, or liability, for its own negligence. Homeowners' policies, and many business owners' policies, also known as "BOP" policies, often also provide property coverage. That is, the policies require that the insurer pay the insured for the loss or damage to the insured's real or personal property when the loss or damage results from a cause of loss covered under the policy. When the insured makes a claim to recover under its own policy for damage caused to its own property, called a first-party property claim, the insurer will evaluate, or adjust, the claim. If the damage was caused by a covered cause of loss, the insurer will pay the insured either the value of the property at the time of the loss, including depreciation, or the cost to repair or replace the property if the repair or replacement is done within a certain amount of time after the loss.

Once the insurer pays the insured's first-party property claim, the insurer can try to recover the money it paid to its insured, from the person or entity that caused the damage in the first place. This is subrogation. By paying the insured's claim, the insurer becomes subrogated to the insured's right to recover from the party that caused the damage, to the full amount it paid the insured under the policy. The insurer can sue in the insured's name, even when trying to recover the insured's uninsured loss, when the insured assigns all its rights to recovery to the insurer, which it often does in a subrogation receipt. See CPLR 1004, and CNA Ins. Co. v. Carl R. Cacioppo Elec. Contractors, Inc., 206 A.D.2d 399, 400, 616 N.Y.S.2d 187 (2nd Dept. 1994).

Continue reading "SUBROGATION IN NEW YORK: THE BASICS - IF THE SHOE FITS " »

Collapse coverage for first-party property claims in New York is important because of the large building damages involved and the various policy exclusions that help determine whether the policy affords coverage for the claimed loss. As with any other complex problem, however, you should start with the basics: the definition of collapse.

In our last article on the subject, we discussed what constitutes a collapse in New York. Some courts have concluded that a collapse occurs when the structural integrity of a building is substantially impaired. Royal Indem. Co. v. Grunberg, 155 A.D.2d 187, 553 N.Y.S.2d 527(3rd Dept. 1990). Others require that a collapse include an element of suddenness, a falling in, and total or near total destruction. See Graffeo v. U.S. Fid. & Guar. Co., 20 A.D.2d 643, 246 N.Y.S.2d 258 (2nd Dept. 1964), motion for leave to appeal denied, 14 N.Y.2d 685, 198 N.E.2d 911 (1964).

It's also important to know the reasoning behind the rules in order to understand how they apply to any given claim. In this article we are going to discuss the reasoning behind the substantial impairment rule, set out in Royal Indem. Co. v. Grunberg, supra. A close examination of the facts of that case expose the reasons why the rule has been implemented in so many jurisdictions.

In Royal v Grunberg, supra, the insureds were homeowners who purchased land on which to build their house. It was a modular home, in which the pre-fabricated sections are transported to the site and, as they are placed on the foundation, joined together into a finished home. The land on which it was built was hilly and overlooked a ravine; it must have had a gorgeous view.

During the course of construction, however, the Insureds noticed serious problems. One wall of the house, which faced the east, or the downslope of the hill, as well as a deck, were seven inches out of plumb. Certain windows and doors wouldn't open or close. A large number of cracks developed throughout the house, including a four inch deep crack that ran along the entire basement floor. The foundation wall on the east, or downslope, side of the house, bowed outward; and the house itself tilted in the same direction. The house, in other words, looked like it was leaning downhill. It did not, however, fall down or fall in; its walls still stood; and it was not reduced to rubble. It still was a house, not a pile of debris. The Insureds repaired the damage and made a claim to recover under their policy of homeowner's insurance for the cost of the repairs. The carrier disclaimed coverage and commenced a declaratory judgement action seeking a declaration that the Insureds' claim was not covered by the policy.

The main issue in the case was whether the house had collapsed, even though it had never fallen down.

Continue reading "Collapse Coverage In New York II - Huff & Puff & Blow Your House Down" »

Everyone might think they know what a collapse is. Everyone probably says they know a collapse when they see it. Most New York businesses and homeowners have policies of property insurance to protect them and their property from major, and sometimes minor, damage. But has anyone ever really taken the time to figure out whether a collapse is actually covered under their policy of property insurance? Even if the policy states that it provides additional coverage for collapse, whether or not the policyholder will be able to recover depends, in large part, on the definition of collapse.

There have been a number of major collapses in the news recently. There have been crane collapses in New York City. The blizzard of February 8-February 9, 2013, aka winter storm Nemo, dumped more than two and one half feet of snow on many parts of eastern Long Island. As a result, the roof of a local bowling alley in Smithtown, New York collapsed, and the nearby Smithhaven Mall was evacuated because authorities feared the roof would collapse when large amounts of water gushed through the ceiling of multiple stores within it.

The two recent incidents on Long Island point out the key aspects of what constitutes a collapse under New York law and whether a policy of property insurance will provide coverage for it when it occurs. To be clear, we are talking about a specific type of claim: A first party property claim. This is one in which the policyholder, which is normally the business owner or the homeowner, makes a claim to recover for what they allege is damage that occurred as a result of a loss for which the policy provides coverage; i.e., they try to recover under their own policy of insurance.

Under New York law, there are two definitions of collapse. The first is the significant impairment of the structural integrity of a building or part of a building. This means that a building or part of a building does not have to fall down, fall in, or be nearly destroyed in order to collapse; it can just be in imminent danger of doing so. See Royal Indem. Co. v. Grunberg, 155 A.D.2d 187, 553 N.Y.S.2d 527(3rd Dept. 1990). This seems to be the view of the majority of courts and jurisdictions across the country.

The second definition requires that a collapse include an element of suddenness, a falling in, and total or near total destruction; and it excludes sinking, bulging, or cracking. See Graffeo v. U.S. Fid. & Guar. Co., 20 A.D.2d 643, 246 N.Y.S.2d 258 (2nd Dept. 1964), motion for leave to appeal denied, 14 N.Y.2d 685, 198 N.E.2d 911 (1964). A policy of property insurance, however, can specifically exclude coverage for imminent collapse; it depends on the precise policy language. See Rector St. Food Enterprises, Ltd. v. Fire & Cas. Ins. Co. of Connecticut, 35 A.D.3d 177, 827 N.Y.S.2d 18 (1st Dept. 2006).

Continue reading "Collapse Coverage in New York - Does a Building Have to Fall Down to Be Covered?" »

We have been discussing how much a New York business can recover from someone who damages its property. If the property is damaged, but not destroyed, the business normally can recover either the loss in market value caused by the damage, or the cost of repairs, whichever is less. See Fisher v. Qualico Contracting Corp., 98 N.Y.2d 534, 539 (2002). See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the property is totally destroyed, it can recover the reasonable market value of the property just before it was destroyed. See Gass v. Agate Ice Cream, 264 N.Y. 141, 143-44 (1934). If the destroyed property is a business' sales inventory, the business normally can recover the wholesale cost of the merchandise, because that is what it would cost to replace the merchandise, and any damages actually sustained by reason of the absence of the articles while they are being replaced. See Dubiner's Bootery, Inc. v. Gen. Outdoor Adver. Co., 10 A.D.2d 923 (1st Dept. 1960). These rules seem intrinsically fair because each will put the business back to where it was before the loss.

A business also can try to recover for damage to its property by making a claim under the property coverage of its business owner's insurance policy. If the policy covers the type of property that was damaged, the damage was caused by something the policy insures against, and the insured otherwise has lived up to its obligations under the policy, the business owner should be able to recover for the damage to its property. The amount the business can recover depends on the language of the policy. It might be able to recover only the actual cash value of the property. One way to determine that is replacement cost minus depreciation. It might be able to recover the replacement cost of the property, without deduction for depreciation. For the destruction of sales inventory, it might be able to recover the sales price of that inventory, if it has purchased the proper coverage. Sometimes, an insurance policy, depending on how it is written, might reimburse the business for its lost income. Even then, however, the business should be aware that it cannot recover both the retail selling price of the damaged inventory and the income it would have earned by selling that same merchandise.

This is illustrated by J & R Electronics Inc. v. One Beacon Ins. Co., 35 A.D.3d 169 (1st Dept. 2006). The case involved J&R Electronics, an electronics retailer in Manhattan that was badly damaged as a result of the terrorist attacks in New York City on September 11, 2001. As a result, it made a claim to recover, under its policy of property insurance with One Beacon Insurance Company, for, among other things, the damage to its merchandise, and for its loss of business income. Pursuant to the terms of the policy, One Beacon paid J&R the selling price minus unincurred expenses for the damaged merchandise. That basically means that J&R was paid the selling price minus the money it normally would have spent in order to sell the merchandise. When One Beacon paid J&R's claim for loss of business income, it subtracted the amount it paid J&R for the sales price of the damaged merchandise. J&R objected to this, claimed the sales price should not be subtracted from its lost income, and sued. The appellate court held that J&R could not recover both the selling price of the merchandise and the lost income based on its failure to sell that same merchandise; to do so would have been to give J&R a double recovery.

What the court did in J & R Electronics Inc. v. One Beacon Ins. Co., 35 A.D.3d 169 (1st Dept. 2006), was to apply to an insurance policy the basic idea behind compensatory damages: to make the injured party whole. Since J&R, as a retailer, would have made money from selling its merchandise, it could recover that lost income only once. Anything else would have put J&R in a better position after the loss than it was in before the loss. It is that basic idea that every business should keep in mind when planning on how to recover if its property is ever damaged.