Property Insurance Coverage Law Blog : Florida Insurance Lawyer & Attorney : Merlin Law Group Law Firm : Tampa, Houston, Coral Gables, Gulfport

Most of its customers are not interested in or financially equipped to deal with long term litigation. Customers just want to be treated fairly and get paid fully and promptly for their losses. Unlike in the Tuepker case, where the Tuepkers were paid substantial settlement monies by State Farm prior to the appellate outcome, the Broussards have been paid a mere $2,400 since Katrina.    William Walker and Jack Denton represent the Broussards. They tried the case quite differently than my firm would have, but did a very good job. With little pre-trial discovery, they inexpensively and quickly presented the facts to the jury and got to the critical issues of the case on the record.

At trial, Judge Senter directed a verdict in favor of the Broussards, ruling that State Farm committed bad faith in the investigation and adjustment of the case. The jury was allowed to consider, and did find, that State Farm should pay punitive damages for its bad faith conduct. The speed of the trial surprised us, though the result did not. At trial, it appeared that State Farm's only evidence showing the cause of damage to the Broussards' structure was a late guess regarding causation made by experts long after State Farm denied the claim.

Like many homes that were total losses as a result of Hurricane Katrina, State Farm faced the nearly impossible task of proving how much of the damage was caused by flood waters or storm surge which are excluded causes under the policy. In partial loss situations, it is much easier to make this determination because the structure is left for adjusters to examine and determine the amount of covered and uncovered damage. When only a slab remains, the practical problem is that the evidence needed to prove the excluded causes no longer exists and absent direct evidence, State Farm and its experts must rely on a best "guess" as to the amount of damage excluded. Senter essentially ruled that this "guessing" of the excluded cause of damage was manifest bad faith.

The impossibility of determining with any precision the amount of damage caused by the excluded flood perils was exactly what many of State Farm's initial engineering reports were saying. Indeed, many of these early engineering reports from all carriers indicated that wind, a covered peril, did cause damage and that determining the amount of the excluded flood damage was not possible for lack of evidence.

In investigating our own client's claims, we spent time with many carrier catastrophe adjusters immediately following the storm, and even they admitted this and speculated that under traditional "all risk" adjustment principals, most slab claims would have to be paid because the carriers could not prove the exclusion without speculation.

However, what goes on in the field and what insurance representatives agree they are taught about how the policies are supposed to work BEFORE the loss occurs does not reflect what claims management and their attorneys will later argue in denials or to judges that have no such adjustment experience or training. This was exactly what was happening at the 5th Circuit Court of Appeals on Wednesday. Judges rely upon briefs and argument from the attorneys to get rulings right. Most judges are not experts in insurance law. Even the basic principals of adjustment or policy language may seem confusing to those not experienced with the history and lore of insurance.

In Broussard, State Farm sold an all risk insurance policy. Long standing insurance law principals that are taught in basic classes to all adjusters is that an insured under this type of policy need only show that a physical loss has occurred and the dollar amount of the damage. Unless the insurance carrier proves the loss is excluded, the insured gets paid. This type of policy was developed in the 1940's and 1950's and replaced the "named peril" policies. The proof cause requirements are different between the two policies. The difference is significant and has some relevance in Broussard. If a policyholder has a "named peril" policy, the policyholder has to prove that the physical damage was caused by a peril "named" in the policy. If the policyholder does so, the burden then "shifts" to the insurer to prove that the loss was excluded.

There was a great deal of questioning from the appellate jurists regarding these very basic, but sometimes confusing, concepts. Honestly, if insurance companies followed these basic principals and courts did not confuse them, I and my colleagues would have a lot less business.

The "all risk" policy is an enhancement of the "named peril" format because unless excluded, all "physical" damage is typically covered. At trial, the policy holder merely proves that an all risk policy existed, physical damage occurred, and give evidence of a dollar amount of damage to prove a prima facie case of entitlement to benefits. The insurer then has the sole responsibility to prove that the loss was caused by something excluded.

An example as to how the two policies work and produce different results can be helpful. Suppose a person insures a structure in a neighborhood but it cannot be seen by the neighbors because it is set far back on a private road, hidden by trees and vegetation. The person goes on a month long vacation and comes back to find his house completely missing. He learns that during his absence his neighborhood had been ravaged by a fire that destroyed thirty percent of the homes by at least 85 percent of the repair value. Then, tornadoes damaged another thirty percent of the homes and 90 percent of those tornado damaged homes were total losses. Finally, a few days before he arrived home, a tsunami wiped out all the remaining homes and those partially destroyed. No eyewitnesses or direct evidence demonstrated which of these three perils doomed his structure or whether and how much damage occurred as a result of the first two. If the person was insured under a "named peril" policy covering fire only, he has a major problem. While there are probabilities that the fire may have caused some amount of damage, there is no proof that it did. He cannot meet his burden and will lose at trial because he cannot show that fire caused the damage nor the dollar amount of fire damage. The result is the opposite under an "all risk" policy. All he needs to show is physical loss--the structure is gone--and the dollar damage which is easy since it is a total loss. Now, the insurer has the impossible burden of proving the exclusion. While we may learn from the Almighty in our afterlife what really happened, it is simply a guess, speculation and probability as to what caused the amounts of damage to the structure in this life. The insurer should, maybe not happily, but should pay its customer because the exclusion of flood cannot be proven as the cause of loss. This is how the "all risk" product is supposed to work.

Unfortunately, nothing close to this was discussed in Wednesday's oral argument. As masterful as Bill Walker was at trial, Judge Edith Jones accused Walker of being "flip" in his arguments before the court. Walker teaches insurance law at Ole Miss, but there was little taught during his argument. The judges seemed bewildered. For example, one panelist asked whether the policyholder has to prove the amount of "covered" damage and not just a dollar amount following damage. While some of my colleagues would knee jerk respond "no," the correct answer is "yes." The response should have been: "Yes. In a named peril policy, the policyholder must prove that the damage was caused by a named peril and the dollar amount. However, in an "all risk" policy like the one the Broussards purchased, they must show physical damage and prove a dollar amount of damage. State Farm has already stipulated that the house sustained physical damage and that the dollar amount was for the policy limits to the real and personal property." He could have gone a step further, but did not, and said: "The Personal Property section of the policy issued by State Farm covered the contents on a named peril basis. The named peril which caused that damage is "windstorm." State Farm has stipulated that Hurricane Katrina is a "windstorm." In State Farm's manuals and operation guides, it notes that hurricanes are examples of windstorms. Its own claims managers admit this. Thus, the Broussards have met their burden of proof under both sections of the policy. State Farm therefore had the burden to prove the amount of damage excluded and failed to meet this burden."

The problem is that Bill Walker did not have the evidence about the operation guides and claims manuals in the trial record. He may not even know about them. His discovery was not extensive, but he did not need it at trial because of the excellent job he did at simplifying issues and destroying the ridiculous "probabilities analysis" State Farm concocted in an attempt to prove damage.

Judge Senter noted that State Farm admitted that a "windstorm" damaged the property. While the claims management in Bloomington may disagree, the wind/water protocol and the creative, after the fact effort, to prove the amount of "possible" damage by wind through statistical experts is where State Farm damned its customers. Before Katrina, the issue about paying or not paying for physically damaged homes which were destroyed through a covered cause of loss, wind, or by an excluded flood had not arisen frequently enough for State Farm to make an operational guide. I assume, following the aforementioned principals, that State Farm previously paid those claims.

Faced with the dilemma of paying for hundreds, if not thousands, of "slab" homes, upper management of State Farm made a new claims standard known as the "wind/water protocol." In short, it stated that in absence of physical evidence demonstrating wind damage, the claim should be denied. Since slab cases had no physical evidence remaining, the entirety of those claims were denied. Unfortunately for many along the Mississippi Gulf Coast, other insurers, but not all, followed the example of the industry leader. State Farm and many other carriers started denying claims en masse approximately six weeks after the storm. Many of these denials were based on simple and quick field observations by the claims representatives following "marching orders" from home office executives. Indeed, since many engineering reports undermined the analytical basis for complete denial, many companies ordered engineering investigations stopped.

A former CEO of Allstate, Jerry Choate, once said that Allstate would be judged when it came to "moments of truth." Those are the instances where hard decisions would be made to do the "right" thing regardless of the economic consequences. I have remembered those words every time these issues arise because ethical claims behavior calls for a different standard. It is hard for me to believe that somebody in Bloomington did not have the backbone to raise it. It is why have I have frequently asked claims management to reconsider what they have done and possibly have a change of heart.

Nevertheless, Judge Edith Jones commented that nobody paid much attention to the "wind/water protocol" in the briefs and nobody mentioned it in argument until she raised the topic during Clark Holland's rebuttal on behalf of State Farm. Judge Senter, who appears to be of a similar mind to my firm, found this written standard as evidence of bad faith because it violated long standing good faith requirements requiring full investigation and it wrongly changed the burden of exclusionary proof the insurer had under traditional all risk coverage analysis. Holland claimed that the protocol correctly guessed the proper standard which Judge Edith Jones wrote about in Leonard vs Nationwide. While I have publicly criticized portions of Jones' opinion previously, there is nothing in it which comes close to what State Farm made up as a reason to deny slab claims.

From a practical standpoint, it is a ridiculous standard. The strongest winds with the most damage were within the first several miles of the Coast. Many of these structures also sustained flood and storm damage. However, State Farm was paying tens of thousands and sometimes, hundreds of thousands per claim on losses which occurred twenty, fifty and a hundred miles further inland with far less wind strength. Many of these losses were caused by homes that lost shingles, roofing and windows allowing rainwater to soak the inside of the structures and contents. Thus, State Farm created an arbitrary standard resulting in no payment to those who had the highest amount of wind force and knowing that it was paying millions for structures losses which in all probability had sustained much less wind damage than those along the Coast. At the Broussard trial, this was an apparent reason for the grant of punitive damages. However, it was never discussed at oral argument. Possibly the appellate judges or their clerks never thought of this. Most of my clients have because the unfairness is easily discernible to those whom have suffered complete denial.

It is rather strange for one to think you can learn how doctors are supposed to practice medicine or about medical standards by reading medical malpractice appellate cases. Those are taught in medical treatises. Yet, there was no discussion yesterday about how State Farm trained its adjusters before Katrina, what is in their claims manuals, or how the basic claims treatises would handle these issues. Thus, Clark Holland and State Farm were free to argue that the Court should do what they say rather than do what they said and did before the dollar impact of Katrina slab cases created a new way of thinking for the insurance industry.

While watching the arguments before the Court, I wanted to raise my hand or yell, "let me tell you what I know".  It is very difficult to be a bystander when you have a lot riding on the outcome of how well others perform; I found it nearly impossible to patiently watch and say nothing. From my perspective and experience, State Farm is trying to have its very able lawyers argue before relatively inexperienced insurance law jurists, to get it out of its known contractual obligations.

Unlike others, this will not be my final venue for fighting wrongful claims practices and misinterpretation of insurance policies. I am very concerned that the overstatement in Leonard will be a wrongful basis for denial or an avoidance of accountability for bad faith conduct. I am concerned about the effect of improperly reasoned decisions on future events. The truth is the Fifth Circuit is guessing about how the Mississippi Supreme Court would rule on these matters. It has the right to request the Mississippi Supreme Court make these legal determinations. My guess is that they will not. Instead, my prediction is that we (plaintiffs attorneys) will have to do everything we can to help Bill Walker, Jack Denton and the Broussards when they have to try their case again and make sure that we get it completely right the second time. If I have to watch from the bench, I can at least try to help anyway I can.