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William S. “Bill” Stone likens his five-year-old case against Security Life Insurance Co. to a snarled fishing line. But one of Security’s lawyers, William D. Barwick, says the case could have been straightened out early on. “We offered to settle this case within a month after I got involved in 1996,” he says. Says Stone, “When you’re out [on a lake] and there is just such a snarled mess of fishing line, the action of choice is to take out your pocket knife, cut the line, and re-rig.” Stone, a Blakely, Ga. sole practitioner, represents Gordon and Clarice Clark, who claim Security defrauded them. The insurance company “just tries to make it as confusing as possible so that nobody understands it,” he says. Former Georgia Supreme Court Justice Hardy Gregory Jr. of the Cordele firm Davis, Gregory, Christy & Forehand also represents the Clarks. But this case is worth understanding. There is a big payoff for those who win Racketeer Influence Corrupt Organization Act claims against insurance companies — treble damages, lawyer’s fees and interest. And this intricate case, as it wends through Georgia’s highest courts, is shaping the landscape of this niche litigation. In its latest ruling a divided state supreme court has issued what could be a deathblow to the Clarks’ RICO case and perhaps future cases brought by insurance customers who wish to recover under Georgia’s RICO statute. The supreme court held that the Court of Appeals properly found that while the Clarks’ policy was wrongfully rescinded, they couldn’t prove the rescission flowed from a RICO scheme. The Court of Appeals’ earlier ruling — just reinstated by the supreme court — holds that to recover under RICO injuries must flow from the commission of one or more of 35 listed offenses under the RICO Act, or “predicate acts.” The injury must be caused by the predicate act, it ruled. Chief Justice Robert Benham and Justice George H. Carley dissented in part to the ruling. The Court of Appeals correctly construed the high court’s earlier holding, Benham and Carley maintained, erring procedurally only by declining to consider Security’s remaining enumerations of error before affirming the judgment of the trial court. “The earlier decision made clear that minor regulatory infractions could not form the basis for predicate acts,” says Barwick of Southerland, Asbill & Brennan. From the very beginning the plaintiffs had a clear-cut cause of action arising from a breach of contract, Barwick says. “They had the opportunity to be fully compensated and made whole, but abandoned that claim and proceeded under a little more exotic theory,” he says. “That would certainly be one lesson to take away from this case.” Last week Stone filed a motion for reconsideration and an alternative motion to modify the supreme court’s judgment. Barwick says he is preparing a response. AGENT FORGED APPLICATION In 1994 the Clarks bought a health insurance policy. The Damascus, Ga., storeowners already had health insurance, says Gregory, but an insurance agent persuaded them his deal was better. The agent, John Fipps of Conyers, Ga., represented Security Life Insurance Co., which underwrote the policy. Gordon Clark told Fipps he had undergone a heart bypass within the past five years. The condition “arteriosclerosis” was noted on the application the Clarks signed. But Fipps submitted to Security a false application that failed to disclose the ailment, after forging both the Clarks’ signatures to the document. Fipps knew the company would never have issued the policy given Gordon Clark’s condition, says Gregory. Fipps concealed the forgeries by removing the signature page from the policy delivered to the Clarks, their lawyers maintain. Security issued a policy to the Clarks based on the forged application. When the Clarks submitted a claim, the bogus information came to light and Security rescinded its policy. “This is a tragedy that has happened over and over in my experience,” Gregory says. The Clarks sued for fraud and violations under Georgia’s RICO Act, based on Fipp’ actions. Security filed a counterclaim charging the Clarks with fraud. After discovery, the Clarks amended their complaint further charging that Security was liable for participating in a RICO mail and wire fraud scheme to sell unapproved insurance that did not comply with state laws. Before trial Security offered to reinstate the Clarks’ policy. TRIAL AND APPEALS After a six-week trial before Early (Ga.) Superior Court Judge E. Tracy Moulton, the jury returned its verdict. For the Clarks: $4 million in compensatory damages and $1.5 million in punitives and attorneys’ fees. Since they won their RICO claim, the Clarks were entitled to treble damages. In total, the jury had sent Security a $14.4 million message. Security appealed. The company claimed, among other things, that Moulton should have granted a directed verdict for the company at the close of evidence and not for the Clarks on their wrongful interference with property claim. Chief Judge Gary B. Andrews, joined by Presiding Judge A.W. Birdsong Jr. and Judge John H. Ruffin Jr., agreed. Security Life Ins. Co. v. Clark, 229 Ga. App. 593 (1997). In a December 1997 order, the Court of Appeals took judicial notice that the Georgia insurance commissioner approved for sale in Georgia an insurance policy similar to the Clarks’ policy, demonstrating that it was not contrary to Georgia law. This resolved most of the issues of the validity of the Clarks’ policy in favor of Security, the panel ruled. At trial, the Clarks also claimed that Security was vicariously liable under RICO for its agent Fipps’ forgery. The Court of Appeals panel applied principles of vicarious tort liability and held that Fipps wasn’t acting within the scope of his agency with Security when he forged the application. The panel further ruled there was no proof that Security’s failure to file the Clarks’ policy with the Georgia Insurance Department had proximately harmed the Clarks. The Clarks sought and won certiorari from the supreme court. Clark v. Security Life Ins. Co., 270 Ga. 165 (1998). The Court of Appeals was wrong to take judicial notice because the insurance commissioner’s approval of a policy wasn’t readily ascertainable from a reliable source, the court ruled. Further, the Court of Appeals incorrectly applied vicarious tort liability principals to hold that Fipps was acting outside the scope of his agency. Criminal standards must be applied to vicarious liability under RICO, the high court determined. Under tort law, employers may be held liable for their employees’ tortious acts committed voluntarily or negligently during the scope of employment. But under the higher criminal standard, liability attaches to the employer only when the crime is authorized, requested, commanded, performed or recklessly tolerated. The supreme court ruled that the trial court did not err in denying Security’s motion for directed verdict on vicarious liability under RICO. Lastly, the high court determined that the Court of Appeals did not err when it held that Security’s failure to file the policy could not serve as a basis for liability under RICO. Violations of the insurance code, which are misdemeanors, are not defined as “racketeering activity” under the state’s RICO statute, and the court declined to broaden the legislative definition of prohibited activities. The supreme court said its holding didn’t mean that a plaintiff cannot recover under RICO if he proves an insurance fraud scheme that otherwise meets the statutory definition of “racketeering activity.” The supreme court did not address the Court of Appeals’ determination that there was no proof that Security’s failure to file the Clarks’ policy with the Georgia Insurance Department had proximately caused harm to the Clarks. It is on this point that the rest of the story turns. On remand, the Court of Appeals panel adopted the judgment of the Supreme Court as its own, vacated portions of its first decision and remanded the case. Security Life Ins. Co. v. Clark, 239 Ga. App. 690 (1999). This decision was substituted for an earlier panel decision authored by Chief Judge Andrews. Although the supreme court did not address proximate cause, a plurality of the Court of Appeals vacated its first ruling on that issue and reinstated the trial court’s judgment for the Clarks on the RICO claim. The Court of Appeals did this because it concluded that the supreme court’s ruling on vicarious liability wasn’t consistent with its own first ruling on proximate cause. This time, it was Security that sought certiorari and, once again, the high court granted it. This time the court considered whether the Court of Appeals had erred by vacating the portion of its opinion that held that the Clarks had failed to prove proximate cause, an essential element of the Clarks’ claim. In its latest ruling the high court has determined that the Court of Appeals erred when it vacated its first ruling on proximate cause. Since the high court did not address that issue, it said, it effectively affirmed that determination by the Court of Appeals, and that became the law of the case. Also, the Court of Appeals ruling on vicarious liability was consistent with the supreme court’s ruling on proximate cause because Fipps only committed a single predicate act of forgery that was unrelated to the alleged RICO scheme. Security’s lawyer is happy with this last ruling. “At the appellate level you can pretty well presume that 15 or so judges have looked at this case,” Barwick says. “I think they’ve understood these issues ultimately and gotten it right.”

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