Zalma on Insurance
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March 11, 2022
Man Bites Dog Story: Insurer Sues Insured for Fraud

Fraud by Insured Allows Both Compensatory and Punitive Damages to go to Defrauded Insurer

Read the full article at https://www.linkedin.com/pulse/man-bites-dog-story-insurer-sues-insured-fraud-barry-zalma-esq-cfe and at https://zalma.com/blog plus more than 4100 posts.

Posted on March 11, 2022 by Barry Zalma

Alexander Dallal and Claire Dallal (“the Dallals”) appealed following an adverse jury verdict. The jury awarded Plaintiff-Appellee Lincoln Benefit Life Company (“Lincoln”) $619,290.49 in compensatory damages and $300,000 in punitive damages. In Lincoln Benefit Life Company v. Alexander Dallal, an individual; Claire Dallal, an individual, No. 21-55152, United States Court of Appeals, Ninth Circuit (March 1, 2022).
LACK OF EXPERT REPORT DEFEATS TESTIMONY

The Dallals’ claimed their expert was improperly not allowed to testify. However, the expert witness disclosure as to Dr. Chow was untimely and was never accompanied with a report satisfying the requirements of Federal Rule of Civil Procedure 26(a)(2)(B). Accordingly, exclusion was well within the district court’s discretion.
STATUTE OF LIMITATIONS STARTS RUNNING ON DISCOVERY

The parties agree that the three-year statute of limitations found in California Code of Civil Procedure § 338(d) applies to Lincoln’s claims. This statute incorporates the “discovery rule” to “fraud actions by statute,” Cansino v. Bank of Am., 169 Cal.Rptr.3d 619, 628 (Cal.Ct.App. 2014), providing that any “cause of action . . . is not deemed to have accrued until the discovery, by the aggrieved party, of the facts constituting the fraud or mistake,” California Civil Code § 338(d).

The discovery rule is an “important exception to the general rule of accrual . . . [and] postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action.” Fox v. Ethicon Endo-Surgery, Inc., 110 P.3d 914, 920 (Cal. 2005). Under the discovery rule, the statute of limitations does not begin to run when the last element occurs, but instead at the time the plaintiff “at least suspects that someone has done something wrong to him.” Norgart v. Upjohn Co., 981 P.2d 79, 88 (Cal. 1999) (alterations and citation omitted).

Lincoln sued December 16, 2016. This means that under the three-year statute of limitations established by California Code of Civil Procedure section 338(d), it could only recover for fraudulent claims accruing on or after December 16, 2013, unless the discovery rule applies. December 16, 2013 is the controlling date for any statute of limitations defense raised in this case and the Dallals offer no persuasive argument to the contrary.

The Dallals attempt to contort this standard into one obligating an insurer to presume it is being defrauded by its insureds and investigate claims even in the absence of any evidence of wrongdoing. This is simply not what the discovery rule requires.
SUBSTANTIAL EVIDENCE

Substantial evidence is evidence adequate to support the jury’s conclusion, even if it is also possible to draw a contrary conclusion. The Ninth Circuit did not weigh the evidence, instead, simply ask whether the plaintiff has presented sufficient evidence to support the jury’s conclusion.

The Ninth Circuit concluded that the jury’s conclusion as to the discovery rule was supported by substantial evidence. Specifically, at trial the jury was presented with overwhelming evidence that from 2004 to 2016 the Dallals systematically forged hundreds of records indicating Mr. Dallal was severely physically and cognitively incapacitated in order to wrongfully obtain insurance benefits. And during this period Lincoln did not simply take the Dallals at their word but instead conducted multiple independent nursing assessments during which Mr. Dallal feigned incapacity.
THE RIGHT TO PUNITIVE DAMAGES

The Ninth Circuit must review de novo whether a punitive damages award is excessive. The Dallals challenge the punitive damages award under both California law and the United States Constitution. California law authorizes an award of punitive damages when a plaintiff establishes by clear and convincing evidence the defendant engaged in oppression, fraud, or malice. California law prohibits punitive damage awards that are excessive as a matter of law or raise a presumption of passion or prejudice.

This state-law excessiveness analysis considers a variety of factors including the reprehensibility of the defendants’ conduct, the relation between the compensatory damages awarded and the harm suffered, and the award’s relation to the wealth of the particular defendant. California generally finds punitive damage awards exceeding 10 percent of the defendant’s net worth excessive.

The framework under which California reviews punitive damage awards remains constrained by the Constitution. State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003). Generally, a punitive damage award is unconstitutional when it is “grossly excessive or arbitrary,” which requires a consideration of three factors:

the degree of reprehensibility of the defendant’s misconduct;

the disparity between the actual or potential harm suffered by the plaintiff and the punitive damages award; and

the difference between the punitive damages awarded by the jury and the civil penalties authorized or imposed in comparable cases.

In this case, a punitive damages analysis under either California law or the Constitution compels the same conclusion-the jury’s punitive damages award should remain undisturbed.
CONTRACT OF INSURANCE VOID

Over the course of nearly a decade, the Dallals systematically defrauded Lincoln out of hundreds of thousands of dollars in insurance benefits by forging documents and having Mr. Dallal feign physical and cognitive incapacity. The jury’s punitive damages award was half of the compensatory award and a fraction of the Dallals’ $4,000,000 stipulated net worth. Insurance fraud is serious misconduct, which could be met with both civil and criminal penalties under California law. Ultimately, after considering the requisite factors, the Ninth Circuit found no basis for disturbing the jury’s punitive damages award under either California law or the Constitution.

For equitable relief to issue, the benefiting party must have no adequate remedy at law and must suffer irreparable injury without it. Voiding contracts on the basis of fraud has long been considered a proper exercise of equitable power.

The district court concluded that the Dallals’ fraud had irreparably damaged Lincoln’s ability to trust them, and that continuance of the policy would require the expenditure of a disproportionate amount of resources, justifies the use of equitable powers in this case.

Because the parties agree Lincoln has no mechanism to cancel the Policy absent equity, it lacks an adequate remedy at law. Even if the policy separately insured both Mr. Dallal and Mrs. Dallal does not prevent a total cancellation of the policy because the evidence established they were both active participants in the fraudulent scheme.
ZALMA OPINION

California does not allow an insurer to sue its insured for breach of the covenant of good faith and fair dealing even when as abusive as in this case. However, as this case proves, an insurer may successfully sue an insured for fraud and may obtain both compensatory and punitive damages from its insured. Since the Dallals had a net worth of more than $4 million a $300,000 punitive damage award was minor and more than fair. Lincoln should be commended and emulated by any insurer who has evidence that an insured has defrauded it. Perhaps Travelers who was proved to be defrauded of $15 million should file a fraud suit against the insured in the case described in this blog as “Arson for Profit Proved by Circumstantial Evidence” to recover the $15 million plus punitive damages.

© 2022 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

Subscribe to “Zalma on Insurance” at https://zalmaoninsurance.locals.com/subscribe and “Excellence in Claims Handling” at https://barryzalma.substack.com/welcome.

You can contact Mr. Zalma at https://www.zalma.com, https://www.claimschool.com, [email protected] and [email protected] . Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

You may find interesting the podcast “Zalma On Insurance” at https://anchor.fm/barry-zalma; you can follow Mr. Zalma on Twitter at; you should see Barry Zalma’s videos on https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg/featured; or videos on https://rumble.com/zalma. Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims–library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/

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15 hours ago
Ambiguity in Insurance Contract Resolved by Jury

Jury’s Findings Interpreting Insurance Contract Affirmed
Post 5105

See the full video at https://lnkd.in/gPa6Vpg8 and at https://lnkd.in/ghgiZNBN, and at https://zalma.com/blog plus more than 5100 posts.

Madelaine Chocolate Novelties, Inc. (“Madelaine Chocolate”) appealed the district court’s judgment following a jury verdict in favor of Great Northern Insurance Company (“Great Northern”) concerning storm-surge damage caused by “Superstorm Sandy” to Madelaine Chocolate’s production facilities.

In Madelaine Chocolate Novelties, Inc., d.b.a. The Madelaine Chocolate Company v. Great Northern Insurance Company, No. 23-212, United States Court of Appeals, Second Circuit (June 20, 2025) affirmed the trial court ruling in favor of the insurer.

BACKGROUND

Great Northern refused to pay the full claim amount and paid Madelaine Chocolate only about $4 million. In disclaiming coverage, Great Northern invoked the Policy’s flood-exclusion provision, which excludes, in relevant part, “loss or damage caused by ....

00:07:02
June 23, 2025
The Clear Language Of The Insurance Contract Controls

Failure to Name a Party as an Additional Insured Defeats Claim
Post 5104

Read the full article at https://lnkd.in/gbcTYSNa, see the full video at https://lnkd.in/ggmDyTnT and at https://lnkd.in/gZ-uZPh7, and at https://zalma.com/blog plus more than 5100 posts.

Contract Interpretation is Based on the Clear and Unambiguous Language of the Policy

In Associated Industries Insurance Company, Inc. v. Sentinel Insurance Company, Ltd., No. 23-CV-10400 (MMG), United States District Court, S.D. New York (June 16, 2025) an insurance coverage dispute arising from a personal injury action in New York State Supreme Court.

The underlying action, Eduardo Molina v. Venchi 2, LLC, et al., concerned injuries allegedly resulting from a construction accident at premises owned by Central Area Equities Associates LLC (CAEA) and leased by Venchi 2 LLC with the USDC required to determine who was entitled to a defense from which insurer.
KEY POINTS

Parties Involved:

CAEA is insured by Associated Industries Insurance Company, Inc. ...

00:08:22
June 20, 2025
Four Corners of Suit Allows Refusal to Defend

Exclusion Establishes that There is No Duty to Defend Off Site Injuries

Post 5103

Read the full article at https://lnkd.in/geje73Gh, see the full video at https://lnkd.in/gnQp4X-f and at https://lnkd.in/gPPrB47p, and at https://zalma.com/blog plus more than 5100 posts.

Attack by Vicious Dog Excluded

In Foremost Insurance Company, Grand Rapids, Michigan v. Michael B. Steele and Sarah Brown and Kevin Lee Price, Civil Action No. 3:24-CV-00684, United States District Court, M.D. Pennsylvania (June 16, 2025)

Foremost Insurance Company (“Foremost”) sued Michael B. Steele (“Steele”), Sarah Brown (“Brown”), and Kevin Lee Price (“Price”) (collectively, “Defendants”). Foremost sought declaratory relief in the form of a declaration that

1. it owes no insurance coverage to Steele and has no duty to defend or indemnify Steele in an underlying tort action and
2. defense counsel that Foremost has assigned to Steele in the underlying action may withdraw his appearance.

Presently before the Court are two ...

00:08:29
May 15, 2025
Zalma's Insurance Fraud Letter - May 15, 2025

ZIFL Volume 29, Issue 10
The Source for the Insurance Fraud Professional

See the full video at https://lnkd.in/gK_P4-BK and at https://lnkd.in/g2Q7BHBu, and at https://zalma.com/blog and at https://lnkd.in/gjyMWHff.

Zalma’s Insurance Fraud Letter (ZIFL) continues its 29th year of publication dedicated to those involved in reducing the effect of insurance fraud. ZIFL is published 24 times a year by ClaimSchool and is written by Barry Zalma. It is provided FREE to anyone who visits the site at http://zalma.com/zalmas-insurance-fraud-letter-2/ You can read the full issue of the May 15, 2025 issue at http://zalma.com/blog/wp-content/uploads/2025/05/ZIFL-05-15-2025.pdf
This issue contains the following articles about insurance fraud:

Health Care Fraud Trial Results in Murder for Hire of Witness

To Avoid Conviction for Insurance Fraud Defendants Murder Witness

In United States of America v. Louis Age, Jr.; Stanton Guillory; Louis Age, III; Ronald Wilson, Jr., No. 22-30656, United States Court of Appeals, Fifth Circuit (April 25, 2025) the Fifth Circuit dealt with the ...

May 15, 2025
CGL Is Not a Medical Malpractice Policy

Professional Health Care Services Exclusion Effective

Post 5073

See the full video at https://lnkd.in/g-f6Tjm5 and at https://lnkd.in/gx3agRzi, and at https://zalma.com/blog plus more than 5050 posts.

This opinion is the recommendation of a Magistrate Judge to the District Court Judge and involves Travelers Casualty Insurance Company and its duty to defend the New Mexico Bone and Joint Institute (NMBJI) and its physicians in a medical negligence lawsuit brought by Tervon Dorsey.

In Travelers Casualty Insurance Company Of America v. New Mexico Bone And Joint Institute, P.C.; American Foundation Of Lower Extremity Surgery And Research, Inc., a New Mexico Corporation; Riley Rampton, DPM; Loren K. Spencer, DPM; Tervon Dorsey, individually; Kimberly Dorsey, individually; and Kate Ferlic as Guardian Ad Litem for K.D. and J.D., minors, No. 2:24-cv-0027 MV/DLM, United States District Court, D. New Mexico (May 8, 2025) the Magistrate Judge Recommended:

Insurance Coverage Dispute:

Travelers issued a Commercial General Liability ...

April 30, 2025
The Devil’s in The Details

A Heads I Win, Tails You Lose Story
Post 5062

Posted on April 30, 2025 by Barry Zalma

"This is a Fictionalized True Crime Story of Insurance Fraud that explains why Insurance Fraud is a “Heads I Win, Tails You Lose” situation for Insurers. The story is designed to help everyone to Understand How Insurance Fraud in America is Costing Everyone who Buys Insurance Thousands of Dollars Every year and Why Insurance Fraud is Safer and More Profitable for the ­­­Perpetrators than any Other Crime."

Immigrant Criminals Attempt to Profit From Insurance Fraud

People who commit insurance fraud as a profession do so because it is easy. It requires no capital investment. The risk is low and the profits are high. The ease with which large amounts of money can be made from insurance fraud removes whatever moral hesitation might stop the perpetrator from committing the crime.

The temptation to do everything outside the law was the downfall of the brothers Karamazov. The brothers had escaped prison in the old Soviet Union by immigrating to the United...

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