Appellate Court Says Levee Breaks Not Covered

In a ruling that has significance here in California, despite coming out of Hurricane Katrina damages, a three-judge panel of the U.S. Fifth Circuit Court of Appeals ruled that homeowners, renters and commercial-property policies do not cover damage caused by levee breaks.

The appellate court overturned a decision by U.S. District Judge Stanwood Duval Jr., who sided in November with policyholders who sued claiming that flood damage exclusions in their policies were ambiguous and should therefore be resolved in the homeowners’ favor. Duval found the claims may not be excluded, as the term “flood” may be read only to refer to a natural event and not the result of human errors in the construction and maintenance of the levees.

But Judge Carolyn King, writing for the three-judge panel, disagreed. “We conclude, however, that even if the plaintiffs can prove that the levees were negligently designed, constructed or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs’ policies unambiguously preclude their recovery,” King wrote.

“Regardless of what caused the failure of the flood-control structures that were put in place to prevent such a catastrophe, their failure resulted in a widespread flood that damaged the plaintiffs’ property. This event was excluded from coverage under the plaintiffs’ insurance policies,…we are bound to enforce the unambiguous terms of their insurance contracts as written,” King wrote. “Accordingly, we conclude that the plaintiffs are not entitled to recover under their policies.”

Motto: If you are exposed to a potential levee break, buy flood insurance.

Don Way
CEO

California Workers Comp Reforms Working

California experienced the largest decrease in average workers' compensation costs per claim among 14 states, after years of double-digit cost growth and in the wake of reforms that took effect 2003 through 2006, according to a new study by the Workers’ Compensation Research Institute.

According to the study, “Early Evidence of the Impact of the Multiyear Reforms in California: CompScope Benchmark, 7th Edition,” workers’ comp costs per claim in California dropped by 15 percent in 2004-2005, after a 4 percent increase in 2003-2004, and double-digit growth in previous years.

Legislation in California from 2003 to 2006 revised the state medical fee schedule, increased the maximum weekly benefits, limited chiropractic and physical therapist services, replaced vocational rehabilitation benefits with the Supplemental Job Displacement Benefit, revised the permanent disability schedule and permanent partial disability benefits, and placed a 104-week cap on temporary disability benefits.

The report indicates that payments for lost wages, otherwise known as indemnity benefits, per claim with more than seven days of lost time changed little in 2004-2005, after growth of 7 percent in 2003-2004 and increases of 4 percent to 7 percent in the previous years. However, that result masked two opposing trends, the report indicated.

Duration of temporary disability fell by 1.5 weeks after increasing by almost one week per year since 1996, except for 2003-2004 when there was little change. Also, there was a 6.5 percent increase in the average weekly temporary disability benefit, the result of a 21 percent increase in the statutory minimum weekly temporary disability benefit under 2002 legislation.

The study noted that defense attorney involvement changed little over the study period. Payments to defense attorneys increased 8 percent in 2004-2005, however, about double the growth rate in each of the previous two years.

For more information, visit www.wcrinet.org/.

Workers Comp Fraud by Employers Rising

Workers’ compensation fraud by employers appears to be up significantly in California, potentially cheating insurers out of millions and raising rates for businesses statewide.

The number of suspected fraudulent claims by California employers increased by 2,056 in the fiscal year ended June 30, 2006, almost five times as many as the 417 in fiscal year 2003, according to the state Department of Insurance.

Fraud by medical and legal providers also is on the upswing, with 872 cases of suspected fraud in fiscal 2005, more than double the 429 identified in fiscal 2003.

It’s unclear whether more fraud is happening or more is simply being reported and prosecuted, but the trends align with growth in workers’ compensation premium fraud by employers and medical/legal providers nationwide, according to a study released this month by the Coalition Against Insurance Fraud in Washington, D.C.

The study is considered a barometer of the nation’s annual progress against insurance fraud, which costs up to $80 billion annually. It concludes that a handful of fraud bureaus appear to be particularly effective in detecting and rooting out illegal behavior, and California tops the list.

California convicts more insurance swindlers than any other state – one of every three insurance fraud convictions in the nation, according to the study. The state fraud bureau logged a record 1,546 convictions in 2005, ahead of runners-up Florida at 493 and New York at 450.

California reported the most referrals of suspected fraud at 27,687, followed by New Jersey at 26,000. The referrals come from a variety of sources such as insurance companies, local law enforcement and calls to the fraud hotline.

The state also brings the most resources to the table to fight fraud, both in dollars and employees. California’s $36.8 million fraud division budget is the richest in the country, followed by New Jersey at $29.7 million. The California fraud division is also the largest, with 298 staffers, followed by New Jersey at 270.

“It’s fair to say the California Department of Insurance is one of the more active state agencies in terms of criminal enforcement,” said Matt Jacobs, a former U.S. Attorney who is now a partner in the Sacramento office of DLA Piper. “It’s an agency that has an enforcement staff that does cases. Some agencies don’t have enforcement staff. Some have staff and don’t do cases.”

Not a victimless crime

Insurance is a $115 billion industry in California with a direct impact on the economy, said Dale Banda, a deputy commissioner of the enforcement division at the insurance department.

“When you add up car, life, long-term disability and workers’ comp insurance, it’s a significant amount of your budget in business and personal life,” Banda said. “Insurance fraud is not a victimless crime. It increases costs for everybody.”

Workers’ compensation fraud by employers falls into three categories:

• Those who do not have workers’ comp insurance
• Those who deny benefits rightfully owed to employees and
• Premium fraud, which can mean underreporting payroll or misclassifying employees.

One local example of some of the gray areas in the law is Sacramento business owner Stephanie Nishikawa’s citation for not providing workers’ comp insurance for some relatives who work at her store, The Paper Garden.

Benefit denials run the gamut from employers telling undocumented immigrants they’ll be reported to immigration authorities if they file a claim to situations where “injured workers are being rolled up and dropped off at an emergency room while the employer speeds away,” said Rich Plein, fraud bureau chief for regional offices in Sacramento, Benicia and Morgan Hill.

Premium fraud takes lots of forms and adds up fast. The five cases filed statewide during the current fiscal year total more than $60 million.

“We are seeing some pretty major dollars,” Plein said.

In one Sacramento case last year involving North Point Enterprises Inc., a large residential framing contractor, three Elverta residents were arrested and charged with underreporting employees’ wages by $1.9 million. An audit indicated the business owed $2.7 million in additional premiums.

Work-related injuries are a big cost driver in the construction industry, Banda said, so there are cases where employers under-report injuries to reduce the “experience modification,” or the formula to determine rates based on a company’s history of payroll and insurance claims.

The underground economy is a big issue, too, with employers paying cash under the table and underreporting wages.

“It’s tough to know how much fraud is out there when we only know what’s reported to us,” Banda said.

Study: Obese Workers Cost More in Injury Claims

Overweight workers cost their employers more in injury claims than their lean colleagues, suggests a study that found the heaviest employees had twice the rate of workers compensation claims as their fit co-workers.

Obesity experts said they hope the study will convince employers to invest in programs to help fight obesity. However, one employment attorney warned companies that treating overweight workers differently could lead to discrimination complaints. Duke University researchers also found that obese workers had 13 times more lost workdays due to work-related injuries, and their medical claims for those injuries were seven times higher than their fit co-workers.

The findings were based on eight years of data from 11,728 people employed by Duke and its health system. Researchers found that workers with higher body mass indexes, or BMIs, had higher rates of workers’ compensation claims.

The most obese workers – those with BMIs of 40 or higher – had the highest rates of claims and lost workdays. BMI is a measure of height and weight. A 6-foot, 300-pound person, for example, has a BMI of just over 40.

Study co-author Dr. Truls Ostbye said the findings should encourage employers to sponsor fitness programs.

“There are many promising programs,” Ostbye said. “We’d like to see more research about what is truly effective.”

But there isn't good information about employer-sponsored programs that work, said John Cawley, an expert in the economics of obesity at Cornell University. Employers don't know whether paying for nutrition counseling, obesity surgery or anti-obesity drugs through health insurance makes economic sense, he said.

“It’s now apparent to everybody that obesity is a big problem,” Cawley said. “But the research isn’t there to know where to get biggest bang for the buck.

Cawley noted that BMI does not distinguish muscle from fat and can equate a buff body builder to a couch potato. Although BMI, a measure of height and weight, is used in most obesity research, Cawley’s research has found that blacks are particularly likely to be misclassified as obese by BMI.

New York employment attorney Richard Corenthal cautioned employers not to overreact with discriminatory policies.

“Employers need to be careful not to view this study as a green light to treat obese or overweight workers differently,” Corenthal said.

The study, appearing in Monday’s Archives of Internal Medicine, got funding from the National Institute for Occupational Safety and Health.

Bogus "Claim" Checks

At least 250 people have received a letter purporting to be from “Indemnity Financial – A Subsidiary of Travelers Indemnity Company” and containing a counterfeit Travelers Insurance Company check. The letter informs the victim they have won either a “North American Prize Pool” valued at $250,000 or a $65,000 Readers Digest/Publishers Clearing House Online Sweepstakes. The letter also references a “claim number”, which is not a valid Travelers claim number. The letter instructs recipients to call a phone number, where they are advised to deposit the check to their bank account and wire the funds to an individual in Canada. Travelers has learned that other insurance companies’ names have been used in the same scam.

If you receive an unexpected check from “Travelers Indemnity Company” accompanied by a request similar to this one, please do not deposit the check. Contact us and your local law enforcement authority and the California Department of Insurance instead.

By being alert to this scam, you may be able to help others avoid being victimized by criminals who are using Travelers’ name to prey on the public.

Broad Named Insured Clause

The insured owned and operated hotel properties. Recently, there was a bodily injury liability claim involving a property that the insured had sold and in which the insured no longer had any interest. The property was not listed on any of the policies since the client no longer had an insurable interest in the property.

While the question of insurable interest might be an issue in connection with a property policy, it is not as much of an issue under CGL policies. Liability claims can arise from all sorts of situations, even those that may involve property or operations concerning which the insured no longer has any involvement or apparent interest.

Even though a lawsuit might have no merit, the insured is still faced with the burden of defending the claim.

It is important to identify the various parties that can and should be insured under a corporate insurance program. In order to provide coverage for all affiliated organizations in which an insured has an interest and the responsibility for handling insurance, most property-casualty policies should be endorsed, if underwriters will agree, to include a “broad named insured” clause, indicating that the named insured includes the parent corporations “and all subsidiary, affiliated, or associated companies, corporations, entities, or organizations as may now or hereafter be constituted, for which the named insured has the responsibility for purchasing insurance and for which coverage is not otherwise more specifically provided.” Note that many underwriters will resist such a broad grant of coverage, however.

Improvements and Betterments

Potential for misunderstanding can occur both in arranging insurance for improvements and betterments and in arranging for responsibility for insuring them when you negotiate the lease in the first place. While most property forms include improvements and betterments under the description of insured personal property, they cover only the “use” interest of a tenant in such improvements.

Tenant’s Improvements and Betterments are classified as buildings for rate purposes, which is generally a lower rate than business personal property. When the improvements and betterments are lumped in with other personal property, the higher contents rate is used.

Be aware, too, that many forms do not automatically include coverage for improvements and betterments, e.g., inland marine forms designed to automatically afford coverage for stock or inventory at a number of locations.

If you intend to cover improvements and betterments, the declarations should indicate that coverage is afforded for “Business Personal Property,” or specify a limit for improvements and betterments. The description of covered property should not be limited to “furniture, fixtures, machinery, equipment and stock” or some similar restrictive description.

You must keep track of the value of improvements and betterments, particularly when they represent a substantial portion of insured values at a particular location. If, during the term of the lease, you add improvements and betterments, you should increase your insured values to reflect the additional value.

If the lease does not require the landlord to rebuild after a loss, there is a further problem. Most property insurance policies stipulate that if repairs are not made promptly, the insurer will pay only that proportion of the original cost of the improvements that the unexpired term of the lease bears to the period from the date the improvements were made to the expiration of the lease.

For example, assume that a tenant with a 10-year lease makes substantial improvements to the property seven years into the lease. Two years later, when the lease still has a year to run, the property is destroyed and not rebuilt. The tenant will recover at most only one-third of the original investment.

The Leasehold Interest Coverage Form CP 00 60 should be considered. Most commercial leases have an abatement clause that can terminate the lease if repairs cannot be completed within a certain amount of time or if damage exceeds a certain percentage. This form will pay for the unamortized value of tenant’s improvements and betterments that were not destroyed, but had to be abandoned due to termination of the lease due to a covered cause of loss.