insurance claim – Seattle Insurance and ERISA Blog

Lawsuit Documents Allegations of Discriminatory Claims Handling By Insurer Who Kept A So-Called “Jewish Lawyer List”

Anyone who’s suspected their insurance company gave their claim closer scrutiny because of their race will likely find the allegations in this lawsuit alarming. In short, the insurance company was sued alleging it discriminated against insureds represented by attorneys identified on the insurance company’s secret “Jewish Lawyer List.” The insurer settled that lawsuit, but then turned around and sued the plaintiffs and their lawyers for defamation. The ensuing litigation provides a fascinating glimpse into some appalling racist insurance practices.

The case goes all the way back to 1987. Four drivers were involved in a car crash and sustained damages their insurer refused to cover, claiming the drivers’ claims were fraudulent. The drivers hired attorney Erwin Sobel to sue the insurer to obtain coverage.

In the course of litigating, attorney Sobel discovered documents suggesting his clients’ claims had been flagged as fraudulent because Sobel was Jewish. Sobel uncovered a 1983 insurer memo containing a list of about 160 Los Angeles lawyers, including Sobel – the majority of whom were Jewish. Insureds with lawyers on the so-called “Jewish Lawyer List” had their claims automatically sent to the insurer’s special fraud unit with instructions not to pay any claims. The memo directed the insurer’s agents to destroy the memo after forwarding all the lawyers’ clients to the fraud unit, and to keep the entire system secret from the insureds and their lawyers.

The insurer denied the allegations, but ultimately paid Sobel, his co-counsel and their clients $30 million to settle their allegations of discriminatory claims handling. Among other things, Sobol presented testimony from an economist showing the list contained wildly disproportionately Jewish attorneys.

The case is an unfortunate reminder that insurance practices aren’t immune from racism and discrimination.

The Brave New World of Cybercrime Insurance Coverage Disputes

Computer crime and data breaches have become a reality for most businesses. Words like spearphshing or ransomware that were obscure five years ago are now in the headlines on a regular basis. The FBI calculated over $1.4 billion in reported losses from hacking and similar computer crime in 2017. A data breach can cause serious monetary consequences for businesses, besides the goodwill hit of having to notify customers and colleagues of the intrusion.

Accordingly, business have tried to mitigate the risks of a data breach or hack through insurance coverage. Since cybercrime coverage is in its infancy, it’s unsurprising disputes have arisen between businesses and insurers regarding the extent of coverage under these policies.

Emerging caselaw shows that cybercrime coverage is not immune from the traditional conflict between the insured’s interest in being made whole after a loss and the insurer’s interest in paying as little as possible on claims. A good example is the recent decision by the U.S. Court of Appeals for the Sixth Circuit in American Tooling Center, Inc. v. Travelers Casualty and Surety Company of America. American Tooling Center (“ATC”), lost over $800,000.00 in a phishing scam. Hackers first infiltrated ATC’s email servers and obtained the names of ATC’s contacts with ATC’s Chinese subcontractor. After ATC wired certain payments to its subcontractor, the hackers posed as the subcontractor’s agents and claimed to have never received the payments. ATC canceled its initial wire transfer and re-sent the funds to the hackers. ATC realized what had happened when the genuine subcontractor called to demand payment.

ATC tendered the claim to its insurance carrier, Travelers, under ATC’s coverage for “computer crime.” ATC’s policy provided Travelers “will pay the Insured for the Insured’s direct loss of, or direct loss from damage to, Money, Securities and Other Property directly caused by Computer Fraud.” ATC requested Travelers cover the over $800,000.00 it lost in the phishing scheme.

Travelers refused to pay. Relying on the words “direct loss,” Travelers claimed ATC hadn’t actually lost the over $800,000.00 it wired to the hackers. Instead, Travelers argued ATC only had a “direct loss” in the amounts it had to pay to its subcontractor over and above those amounts it paid to the hackers. Since the subcontractor (presumably sympathetic to ATC) had settled for a reduced payment, Travelers claimed it need only pay ATC the amount its subcontractor agreed to accept.

The court had little trouble rejecting Travelers’ argument, stating:

A simplified analogy demonstrates the weakness of Travelers’ logic. Imagine Alex owes Blair five dollars. Alex reaches into her purse and pulls out a five-dollar bill. As she is about to hand Blair the money, Casey runs by and snatches the bill from Alex’s fingers. Travelers’ theory would have us say that Casey caused no direct loss to Alex because Alex owed that money to Blair and was preparing to hand him the five-dollar bill. This interpretation defies common sense.

Separately, Travelers also argued the phishing attack was not covered under ATC’s computer fraud coverage. Travelers claimed coverage only existed where the perpetrator actually caused the transfer, not where the hackers deceived employees into transferring money unwittingly. The court observed that if Travelers wanted to restrict coverage thusly, it could easily have made that explicit in the policy – indeed, the court pointed out many policies do restrict coverage in this way using language absent from Travelers’ policy.

The ATC decision underscores the emerging issues in cybercrime coverage disputes and the bases insurers will use to deny coverage for phishing, hacking and other computer crime causing losses to businesses.

The Moral High Ground Is Crucial In Insurance Disputes, Confirms Ninth Circuit

In any lawsuit, but particularly an insurance dispute, it’s important to have the “moral high ground.” In an insurance case, this means cooperating with the insurer and responding to the insurer’s reasonable requests for information. Even where the insured is in the right, insurers often seize on the insured’s failure to provide information about their claim or otherwise cooperate in the insurer’s investigation to justify denying coverage or payments. Even where the insurer is acting unreasonably, failing to cooperate with the insurer gives the insurer a pretext to justify its conduct.

This was emphasized in the Ninth Circuit Court of Appeals’ recent decision in Birdgham-Morrison v. National General Assurance Company. Ms. Birdgham-Morrison sued her insurer National General for failing to pay the full amount needed to cover her injuries sustained in a car crash under her Underinsured Motorist (“UIM”) coverage.

Ms. Birdgham-Morrison’s problem was the insurer was able to leverage her failure to provide the insurer more information about her injuries to justify refusing to pay the full amount of her claim. The court noted the insured’s lawyer sent letters to National General demanding it pay the claim, but did not include specific information about her injuries. Similarly, the court noted the plaintiff never responded to the insurer’s requests for additional information about her injuries.

Accordingly, the court ruled that National General did not violate Washington’s Insurance Fair Conduct Act in denying the full amount of Ms. Birdgham-Morrison’s claim.

This case illustrates the unfortunate reality that insureds must be able to show they went above and beyond in assisting the insurer with investigating their claim if they want to get the full policy coverage they paid for.

Washington Court of Appeals Emphasizes Insurers May Not Categorically Ignore Their Insureds’ Treating Physicians When Deciding Whether Injuries Are Covered

Shannon Leahy found herself in a common situation when dealing with her auto insurer following a car crash. Her insurer agreed she was not at fault, but refused to pay her claim, arguing her medical treatment was unrelated to the crash. Ms. Leahy’s doctors agreed her treatment was related to the crash, but State Farm ignored Ms. Leahy’s doctors in favor of the opinions of State Farm’s “independent” medical expert who (unsurprisingly) opined Ms. Leahy’s treatment was unrelated. Can they do that?

In Ms. Leahy’s case, the answer was “no.” On May 21, 2018, the Washington Court of Appeals clarified that insurers may not ignore the opinions of their insureds’ physicians when making coverage determinations in Leahy v. State Farm Mutual Automobile Insurance Company, No. 76272-9-I.

Ms. Leahy was injured when her vehicle was struck from behind. The other driver was at fault, but had insufficient insurance to cover Ms. Leahy’s injuries. Accordingly, Ms. Leahy made a claim with her auto insurance carrier State Farm, with whom she had coverage for Personal Injury Protection (“PIP”) and Underinsured Motorist coverage (“UIM”).

Ms. Leahy was still receiving treatment from her injuries about two years after the crash. State Farm asked her to undergo a medical exam with a third party doctor chosen by State Farm to determine whether her ongoing treatment was medically necessary. State Farm’s third party doctor, Dr. Lecovin, determined Leahy’s treatments were excessive. Thereafter, State Farm determined it would no longer cover Ms. Leahy’s treatment under her PIP coverage.

State Farm also disputed whether Ms. Leahy’ UM policy covered her injuries. State Farm’s adjuster concluded Ms. Leahy’s injuries were not caused by the collision. Ms. Leahy claimed the crash aggravated her pre-existing medical condition and thus that the aggravated injury was covered.

The dispute went to trial, at which the jury found in favor of Leahy. State Farm paid the policy limits. Ms. Leahy asserted new claims for bad faith premised on State Farm’s handling of her claim. The trial court dismissed Ms. Leahy’s claims and she appealed.

On appeal, the Court of Appeals reinstated Ms. Leahy’s claims. The court determined State Farm arguably violated the law by failing to consider the opinions of Ms. Leahy’s treating physicians that her injuries were aggravated by the crash. Ms. Leahy’s physicians were both board-certified rheumatologists and University of Washington faculty. The court determined there was a reasonable dispute whether State Farm could simply ignore their opinions. At minimum, Ms. Leahy was entitled to have a jury decide whether State Farm’s conduct was reasonable.

The court also determined State Farm’s low offer compared to Ms. Leahy’s recovery at trial could potentially show State Farm acted in bad faith. The court emphasized the proper analysis was what State Farm knew at the time it made the offer, not after trial. Given the evidence showed a legitimate conflict between State Farm’s position that Ms. Leahy’s injuries were mostly unrelated to the crash and the opinions of Ms. Heahy’s treating physicians, the court determined Ms. Leahy was entitled to a trial on this issue.

In sum, the Leahy decision is an important win for Washington policyholders because it emphasizes insurers may not categorically ignore the opinions of the insured’s treating physicians in order to deny coverage.

Insurance Coverage Uncertain for Hawaii Homeowners After Volcanic Eruption

Hawaii homeowners who incurred damage or lost their homes entirely now face uncertainty over whether their insurance will cover the damage. The Seattle Times recently interviewed several Hawaii residents who expressed concern over whether they will have any coverage. The eruption has so far destroyed about two dozen homes on Hawaii’s Big Island. Authorities reported about 20 cracks in the ground spewing toxic gas and lava as of Tuesday.

Sea-stacks on Cape Alava, near Ozette, Washington.

Few insurers write policies covering structures in the area because the U.S. Geological Survey classifies it as a high lava risk. Homeowners may have been able to obtain coverage through the Hawaii Property Insurance Association, a nonprofit insurance group created by the state government to fill the gap in coverage for people living in lava risk areas.

Even people living outside the affected areas are questioning whether their policy covers lava damage. While fire insurance policies may cover lava, homeowner’s policies often have explicit exclusions for lava damage.

This can lead to complex coverage questions: if lava causes a forest fire and the fire, not the lava, burns your house down, can the insurer deny payment based on a lava exclusion? In Washington, the answer’s probably not. Washington applies the “efficient proximate cause” rule that can ultimately require the company to cover a loss if the causal chain of events includes a covered loss, despite the involvement of an excluded cause.

Ultimately, insurance coverage issues will cause at-risk homeowners to suffer significant uncertainty in addition to existing concerns about natural disasters.