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

“Further, Jay had no training in meteorology, structural engineering, civil engineering, or other expertise for differentiating between wind and water damage. Audubon also failed to provide Jay with standard meteorological data, a consulting meteorologist, or any other consulting expert in adjusting the Fontes’ claim.

In State Farm Mutual Automobile Insurance Company v. Grimes, 722 So. 2d 637 (Miss. 1998), this Court addressed the issue of punitive damages for denial of an insurance claim, determining that: [t]he issue of punitive damages should not be submitted to the jury unless the trial court determines that there are jury issues with regard to whether:

1. The insurer lacked an arguable or legitimate basis for denying the claim, and
2. The insurer committed a willful or malicious wrong, or acted with gross and reckless disregard for the insured’s rights.

The Fontes’ adjuster, John Jay, made an arbitrary determination that he was “going to adjust this claim based on the top half of the home being damaged by wind,” and he thinks it would be correct to say “that this estimate did not take into account possible damage to the lower portions of the home that would have been caused by the loss of the roof or breaking of the windows on the upper portion of the home from the ingress of rainwater or wind driven water.” Jay’s determination was made with limited expertise, without meteorological data, without a consulting expert, and based on the instruction not to pay one hundred percent of the Fontes’ policy limits. Whether an arguable or legitimate basis for denying the Fontes’ claim existed for Audubon’s decision not to pay the policy limits must be examined by a jury to determine if there existed a gross and reckless disregard for the Fontes’ rights.”

 I was in Judge Senter's Courtroom when he directed a verdict against State Farm regarding its claims handling. He seemed emotionally upset regarding the handling of the claim. State Farm established a Wind Water Protocol for handling cases where the structure was damaged and nothing remained. I wrote about the arbitrary nature of State Farm's decision in a prior post, Broussard Oral Argument: Warming The Bench Is No Easy Task: 

"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." (emphasis added)

Fonte's factual case seems very similar to what State Farm did to its customers--assumed the cause of damage with an arbitrary standard. In many cases, Mississippi policyholders had adjusters with a similar background and experience as the adjuster assigned in Fonte. I suggest that the federal judges are going to have to revisit their claims practice cases and not simply rely on Broussard when interpreting Mississippi law.