Big Insurers, Dirty Tricks

Insurance companies vow to protect their policyholders-for a price-then go to great, often underhanded lengths to avoid keeping those promises. They bank on consumers being elderly, unsophisticated, or unrepresented and unable to respond. Here, three attorneys talk about egregious cases where insurers deployed shady tactics and met policyholders who fought back.

"'That's not my signature'" by Terrence J. Coleman
"Fractured trust" by Lee S. Harris
"She refused to just go away" by Frank N. Darras

'That's not my signature'

Terrence J. Coleman

There was always something funny about the policy endorsement Lloyd's of London relied on to deny it had a duty to defend my client in a catastrophic personal injury action. For starters, she did not recall receiving the endorsement when she bought the policy.

But Lloyd's claimed that she had signed an endorsement providing that the company was not obligated to defend her against personal injury actions. A struggling small-business owner, she could barely meet her regular expenses and could not possibly hire a lawyer to defend her through trial. So she was forced to accept a default judgment of $9 million against her.

Under California law, an insurer that wrongfully fails to defend its insured can be held liable for the entire judgment ultimately rendered against the insured. I filed a bad-faith suit against Lloyd's, expecting that the case would turn on the court's interpretation of the endorsement. But then discovery got under way, and I uncovered an evil deed.

After serving Lloyd's with the complaint, I demanded that it produce a copy of its underwriting file. Its counsel provided a copy of the file that was not Bates-numbered. I don't accept unnumbered documents, as they provide no record of what has been produced. So I numbered the documents and provided a copy of them to opposing counsel, who agreed that they represented a true and correct copy of the original file.

In reviewing the file, I found a copy of the policy, but the key endorsement was not attached to it. The endorsement appeared elsewhere in the file and it was unsigned, although this did not seem significant at the time. The signature line for the insurance company representative was blank. I assumed that the signed version had been sent to the insured and an unsigned version was retained for the file. Still, further inquiry was clearly necessary.

I served a notice to depose Lloyd's "person most knowledgeable" (PMK) to testify about the policy's issuance and the contents of the underwriting file, and I demanded that the original file be produced at the deposition. When Lloyd's produced the "original" underwriting file, it was almost identical to the copy it had produced earlier-almost. Instead of the unsigned version of the key endorsement, the file contained a dated and signed endorsement. "Hmmm," I thought.

Rather than disclose my suspicions of wrongdoing, I asked mundane questions about Lloyd's standard practices. I learned that the company's endorsements are always dated, signed, and mailed to the insured; that the company's method of ensuring that an endorsement has been sent to the insured is to place a signed copy in the file; and that the employee who supposedly signed and mailed the key endorsement to my client was no longer with the company. Conveniently, no one could remember her name ("Puckett, or something like that") and didn't know how to find her because she was from a temp agency.

Back at my office, I stared at the endorsement for a long time. I compared it to another policy endorsement the employee had supposedly signed, and the two signatures, although similar, didn't appear to be the same. My mind started racing: The file contains an unsigned endorsement floating separate from the policy; a signed endorsement appears with the policy in the "original" file; the signature looks a bit off. I had to find Ms. Puckett, or whoever she was.

My investigator had little to go on-no full name, prior address, or telephone number. But he called me at home on a Saturday to say he'd just gotten off the phone with "Ms. Pickett," who had confirmed she had worked for a Lloyd's underwriter for six months putting insurance policies together and was willing to speak with me. I was on the next plane out.

That evening, I sat across from Ms. Pickett at her dining room table and pulled out a copy of the key endorsement to show her. Before I could say anything that might suggest the nature of my suspicions, she said, "That's not my signature!" She called out to her husband, who was watching television in another room, "Look, honey, someone tried to forge my signature." Her husband agreed.

Ms. Pickett, a mother of four, had returned to work after her children had grown and moved out of the house. She had worked for the Lloyd's underwriter for about six months in a temp position but left because she found a permanent administrative position with another employer. She had no ax to grind. She was the perfect witness.

At her dining room table, I wrote out a declaration setting forth her testimony. Her signature this time was no forgery, and the declaration was "Exhibit 1" to my motion for summary judgment on Lloyd's duty to pay my client's personal injury judgment.

I explained to the court that between the time that Lloyd's produced its underwriting file at the beginning of the lawsuit and when it produced the original file at the PMK deposition, someone had replaced the undated and unsigned endorsement with a forged copy so Lloyd's could argue that it had delivered the endorsement to my client. Lloyd's could offer no other explanation.

I was thankful that we had a clear record of every document Lloyd's had produced both at the start of the case and at deposition. The court granted our motion and ordered Lloyd's to pay the entire underlying judgment, reserving only the issue of punitive damages for trial.

I often think about this case when I'm conducting discovery in other matters because it's rich with practice lessons: Never accept unnumbered documents; always insist on examining the original claims and underwriting files at deposition; spend the money necessary to track down key former employees whenever possible; and most important-never, ever trust an insurance company.

Terrence J. Coleman is a partner in the San Francisco law firm of Pillsbury & Levinson.

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Fractured trust

Lee S. Harris

Consumers who buy and pay for insurance trust in the company's promises of financial security in times of trouble. When an insurer refuses to honor an obligation to defend an insured against a lawsuit, the policyholder often suffers not only financial damage but also physical and even psychological injury. The insurance company's broken promises can have a profound effect on an insured's own self-esteem and ability to trust others.

Robert Drake obtained a liability insurance policy that was negotiated, issued, and paid for in California, where he lived. The policy provided worldwide duties to defend and indemnify against claims for "bodily injury," "property damage," and "personal injury" caused by an "occurrence."

Drake later bought property in Florida, where he intended to build a home for his retirement. He had some preliminary work done to level the lot and get it ready for eventual construction. Morris Albert, who lived next door to the lot, sent a letter to Drake's insurance company, alleging that a retaining wall on his property had been damaged during the leveling work and that dust kicked up by the job was causing his daughter to get sick and break out in hives all over her body.

Albert filed a lawsuit against Drake for property damage but did not include any personal injury claims. Drake's insurance carrier refused to provide a defense and sent him a letter denying the claim and ending all communication with him. The complaint was subsequently amended many times; eventually, it incorporated tort claims based on the facts set out in Albert's letter to the insurer.

Drake paid more than $150,000 in defense costs out of his retirement savings. Ultimately, the suit was dismissed with no payment of damages, and Drake contacted my office to reopen the coverage issues with the insurance company.

We filed suit against the insurer, alleging bad-faith denial of the duty to defend. The insurance company claimed its denial of coverage was proper because the original complaint did not have the tort claim spelled out in the text of the lawsuit, which under Florida law meant the company had not received actual notice of the claim.

Florida is one of a handful of states that has a "four corners" rule, stating that an insurance company is not required to look beyond the four corners of a complaint when determining whether it is obligated to defend an insured. If the covered claim is not specifically set out in the body of the complaint, then the insurance company can close its eyes to other notice it receives, such as demand letters and investigative reports.

But under California law, an insurance company cannot ignore claims that are a potential part of a suit, even if the claims are not specifically spelled out in the text of the lawsuit. As long as the claimant has put the insured (and the insured has put the insurance company) on notice of the covered claim, the insurer is required to hire an attorney to defend its insured. The company's own claims manual recognized the potential coverage requirement.

The legal question before the court was which state's law would govern the legal obligation of the insurance company under its contract. Would it be the law of Florida, where the alleged tort occurred, or the law of California, where the insurance contract was entered into?

The court found that California was the only state that had a legitimate interest in the application of its law and the policy at issue; Drake was a state resident and bought the policy there. It said the California contract was to be interpreted using California law no matter where the tort occurred.

Drake pursued his claim for reimbursement of defense costs as well as punitive damages, and he was able to regain his self-esteem and some security for the remainder of his retirement.

Lee S. Harris is a partner at Goldstein, Gellman, Melbostad, Gibson & Harris in San Francisco.

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She refused to just go away

Frank N. Darras

Long-term care insurance is a big business. Carriers try to hook our parents and grandparents by dangling the promise of peace and security in slick four-color brochures, chock-full of catchy phrases: "Protecting everything you work for," "Our long-term care insurance preserves your financial assets, while providing you choice and flexibility," "We're here to help."

Insurers also tout their financial prowess with branded mottos: "We're the Biggest," "We're the Best," "Rest Easy," "Sleep Tight," "Trust Us," "Count on Us."

Lulled into a false sense of security by these promises of protection and hoping to avoid burdening their loved ones with the cost of their care, senior citizens have lined up to pay hard-earned premium dollars to purchase long-term care policies. Unfortunately, the policies they pay dearly for may not be worth the paper they're printed on.

Take, for example, the policy at the center of a case my firm handled for an 87-year-old grandmother. Born in 1919, Vera Smith moved to Los Angeles from Tennessee in her 20s with $1 in her pocket. She found work as a cleaning lady and school cook, eventually earning enough to buy a house and raise a family.

In 1998, at the age of 78, Smith purchased a home health care policy from Penn Treaty to ensure that her long-term medical care would be covered and her family would be protected from rising medical costs as she aged. The policy defined "home" as "your personal residence, whether it be in a private dwelling, a home for the retired or aged, or a residential care facility."

In 2000, she "upgraded" her policy to an "independent living" home health care policy. It increased Smith's premium by about 33 percent; provided the same maximum benefit; dropped certain benefits, including waiver of premium; and added more restrictions to the policy definitions.

The sales brochures for the independent-living policy promised that Smith would receive "health care at home, because when you're sick, there is no place like home." Penn Treaty further promised to "pay for [Smith] to receive quality care in the comfort of her home, [which] would allow her to preserve her independence and quality of life, and give her the freedom to be herself." It said that "this care can be provided by family members."

This marketing appealed to senior citizens who wished to receive care at home, but Penn Treaty did not disclose that the upgraded policy contained a requirement that your "home" must be "owned or leased by you." The big print drew seniors in, while the little print in the policy erased its ostensibly generous policy provisions. Policyholders were tricked into believing they were buying an "upgraded" policy when, in fact, it provided less coverage at a higher premium.

Smith began receiving home care benefits in 2001 because of debilitating medical conditions, including Alzheimer's disease. By January 2005, she was unable to care for herself and had to move in with her daughter.

Like many baby boomers taking on responsibility for aging parents, Smith's daughter did everything to ensure her mother's care would be covered under the long-term care policy. She took out a loan to add a room to her home that was equipped with grab bars and a wheelchair ramp to accommodate her mother's disabilities. She also notified Penn Treaty of her mother's change of address and informed them that her mother would be leasing the room for $100 a month.

A month later, Penn Treaty denied Smith's claim for coverage, explaining only that "your current residence does not meet the policy definition of your 'home.'" Smith's daughter appealed the denial and sent Penn Treaty copies of the rental agreement, pictures of the addition, the building permit from the city, and daily care-giving notes. Penn Treaty repeated the denial, saying it was "unable to consider 'cash receipts' as proof of a monthly rental fee" and requesting "canceled checks or money orders used to pay the monthly rent."

In response, Smith's daughter explained that her mother was unable to write and that the rent was paid in cash. But Penn Treaty held firm, stating that "the information received as proof of [the] lease [did] not verify that there [was] an actual lease agreement and money exchanges for this lease." Even after Smith's daughter submitted copies of the rent checks (which, since she had power of attorney, she wrote for her mother), Penn Treaty still refused to pay the claim.

The company's interpretation of "home" did not comply with the plain language of its policy. It said that a house is not a home, that a lease is not a lease, and that only canceled checks or money orders would suffice as proof that rent had been paid-but the company's policy said none of this.

Penn Treaty continued to deny benefits, betting that Smith and her daughter wouldn't have the stamina to fight for the coverage that had been promised. The company was hoping they'd just go away. But they filed a bad-faith complaint in state court, and the insurer eventually settled.

Companies like Penn Treaty often wrongfully deny coverage promised to senior citizens, wagering that most elderly insureds won't put up a fight and that those who do won't be able to find competent counsel. Our job is to show those companies that their bets are misplaced.

Frank N. Darras is a partner with Shernoff Bidart & Darras in Ontario, California.

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