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

In Lidawi v. Progressive County Mut. Ins. Co., 112 S.W.3d 725 (Tex.App.—Houston [14th Dist.] 2003, no pet.), the Court dealt with the following cooperation provision: “A person seeking any coverage must … [c]ooperate with us in the investigation … of any claim.” In Lidawi, an argument arose over the examination under oath and what it means to cooperate with that portion of the insurance policy. The Court noted that the policy was silent as to the specifics of both the cooperation and examination under oath provisions of the policy. “When a contract is silent on an issue, Texas court will infer reasonable terms.” The Court added that Texas courts will add missing terms when required to bring about the purposes of the parties under the agreement.

However, before analyzing the cooperation clause’s requirements, “[t]he court must determine what the parties bargained for when they agreed to the terms of the cooperation clause.” The Court determined that the policyholder “bargained for the right to make an honest claim under the policy and to receive compensation with a minimum of inconvenience.” And in return, the Court determined that “[the insurer] bargained for a reasonable means to ascertain the truth surrounding a claim.” As to the cooperation clause, the Court concluded that it “embodies [the insurer’s] right to uncover the probability of truth from the [insureds].” The Court proclaimed that it “must bear these interests in mind when construing the cooperation clause.”

Because the policy did not specify what it meant to “cooperate,” the Court concluded that it:

[S]hould assume the parties implicitly intended for the agreement to operate in a reasonable manner. … The cooperation clause, therefore, should be deemed to allow [the insurer] to take reasonable steps to ascertain the truth of the claims.

So if your insurance policy is like most others – and it doesn’t specify what it means to cooperate – that does not give you free reign to pick and choose when to cooperate. The key is that you are reasonable with your cooperation and allow your insurance company to complete their investigation.

In all areas of law, it is important to understand parties’ respective burdens of proof. Understanding and correctly applying the burdens of proof is particularly important in first party property insurance. At times, insurance carriers misconstrue the burdens of proof, usually to their advantage.

The typical Florida insurance policy obligates the policyholder to produce documents and information requested by the insurance carrier and may contain a provision requiring the policyholder to cooperate with the insurer in its investigation of the claim. The cooperation requirement is intended to help the insurance carrier to determine liability once notice of a claim has been given and to protect the insurance carrier from fraudulent claims.

The Florida Supreme Court has explained that a different presumption applies to a policy cooperation clause because a failure to cooperate defense “sometimes relieves an insurer of liability. . . .[a] failure to cooperate is a condition subsequent and it is proper to place the burden of showing [substantial] prejudice on the insurer.”

Where an insured cooperates to some degree with document production, but the insurance carrier denies the claim because every single document was not produced, the issue of whether there has been a material breach of the insurance policy that would relieve the insurance carrier of its payment obligation is a question of fact for a jury. Schnagel v. State Farm Mutual Automobile Ins. Co., 843 So.2d 1037 (Fla. 4th DCA 2003); Haiman v. Fed. Ins. Co., 798 So.2d 811 (Fla. 4th DCA 2001).

It is important to note the difference between these presumptions for policyholders in Florida, particularly given insurance carriers’ aggressive approach in defending hurricane and other claims, based on a failure to cooperate defense. Insurance carriers argue the failure to cooperate almost as an absolute defense to claims, citing a policyholder’s failure to produce every single item of information and documentation. As Chip Merlin and Corey Harris have previously noted in their posts Cooperation Clause Does Not Require Policyholder’s Slavish Obedience and The Limits Of An Insured’s Obligations To Cooperate, if a policyholder cannot produce every single document requested by the insurance carrier, but they comply to the extent possible, it is unreasonable for the insurance carrier to continue to hold open the policy post-loss conditions and demand the documents that the policyholder is unable produce. The claims handling process must go on. Particularly where policyholders are in substantial compliance with the insurer’s requests, the insurer has a high burden under Florida law. Policyholders should not be strong-armed by insurance carriers that misconstrue their burden of proof and treat a failure to cooperate defense as an absolute bar to recovery.

Insurers typically request these inspections, and in some cases, spend countless hours sifting through all sorts of documents. This is especially true with condominium associations. In fact, if an association files an insurance claim they should expect such a request.

An insurer has numerous motives for reviewing an association’s documents. Often, the insurer is looking for evidence of pre-existing damages. One large condominium insurer in Florida, for instance, has made a practice of conducting exhaustive document inspections. When a loss is reported, the insurer’s legal team rolls into the condominium association with much the same velocity as the windstorm that caused the damage in the first place. Every document available is copied and combed through line by line. This particular insurer even has its own portable copy machines to make the process more efficient.

Condominium associations are a different animal when it comes to documents. Typical associations have a high turn over rate with employees, managers, and even board members. Many times, one hand does not know what the other is doing, and new managers may completely change the filing system. Thus, keeping track of all of the documents can be a consuming process.

Part of cooperating with an insurer in adjusting the loss involves making requested documentation available for inspection and failing to do so may give an insurer a chance to deny the entire claim. In Florida Gaming Corp. v. Affiliated FM Ins. Co., for instance, the insurer argued that Florida Gaming Corp. was not entitled to insurance proceeds for damages resulting from Hurricane Wilma because it had allegedly failed to produce some documentation requested. The policyholder responded that it had made available all documentation in its possession and that it had complied with all of its post loss obligations under the policy. Fortunately for the policyholder, the court agreed that the hundreds of pages of documents produced were sufficient, and the insurer’s motion for summary judgment was denied. Florida Gaming Corp. v. Affiliated FM Ins. Co., 502 F.Supp.2d 1257, 1264 (S.D. Fla. 2007).

While the policyholder in this instance was benefited by a favorable ruling, there was a substantial risk to the solvency of the company if the court had found differently. The claim at issue was in excess of $17,000,000, a substantial potential blow to any organization.

While the revolving door is constantly in motion when it comes to condominium association employees, owners, and directors, it is important to have a plan in place to maintain appropriate records. Some associations believe that they have great insurance and will have no problem if they submit a claim, and in some instances, this may be true. But, as we have seen with the results of the active 2004 and 2005 hurricane season, condominium associations are at great risk of large scale damage.

Having a consistent plan in place to maintain and preserve documents over the years will save a great deal of time. After a loss, the documents will be readily accessible and can be sorted through and produced when necessary to support a claim. This can help large claims be paid more quickly and can help an association get back on its feet faster after a devastating loss.

While it is true that a policyholder’s failure to cooperate with the investigation of a claim can result in a denial of coverage, it is important to note that the cooperation clause was not intended to enslave the policyholder and leave them at the mercy of a carrier’s overly burdensome and unreasonable requests.

As the previous post states, in Florida, carriers have a very high burden in order to void coverage with a cooperation clause defense. The carrier must show a number of things in order to prevail on this defense. While the Coconut Key Homeowners Ass'n v. Lexington Ins. Co., case required the insurer to show that there had been a material breach of the clause and that it had been substantially prejudiced as a result of the breach, previous Florida decisions have broken this test down into a four point test.

In Phila. Indem. Ins. Co. v. Kohne, 181 Fed.Appx. 888 (11th Cir. 2006), the court stated:

Under Florida law, an insurer is excused from its obligations under the cooperation clause if the insurer demonstrates: (1) the insured failed to cooperate; (2) the lack of cooperation was material; (3) the insurer suffered substantial prejudice as a result of the insured's failure to cooperate; and (4) the insurer exercised diligence and good faith in trying to bring about the insured's cooperation.

While this is essentially the same test stated in Coconut Key, it breaks the analysis down a few steps further and even ratifies that an insurer has an obligation to act in good faith to try and get the insured to cooperate. This prevents an insurer from being able to sit on its hands and wait for an insured to commit a perceived breach of the cooperation clause to deny coverage.

Other states have similar decisions and requirements. In Louisiana, the courts have held that an insured’s failure to submit an inventory and proof of loss on a fire claim, as well as an insured’s failure to submit to an examination under oath were material breaches of the cooperation clause and could therefore void coverage. Brantley v. State Farm Ins. Co., 865 So.2d 265 (La. App. 2nd Cir. 2004).

While failing to submit a proof of loss or inventory, as well as failing to sit for an EUO are possibly more likely to constitute a material breach, it is important to weigh each request a carrier makes. Guessing wrong may have a significant effect on the outcome of the claim, so it is always important to seek guidance from a professional source before refusing an insurers request. This way you can make sure that you have all the facts and the best guidance before making this type of important decision.

Many of an insured’s duties after a loss are very straight forward. An insured should report the loss, notify the police in the event of a theft, mitigate damages to prevent further loss, keep an accurate record of expenses, etc. At a basic level, many people can interpret these obligations for themselves. One instance where a policyholder’s obligations after a loss may be cloudy from the beginning is the duty to cooperate with the insurer in the event of a loss.

Most insurance policies have a clause which states that after a loss, the policyholder has an obligation to cooperate with the insurer. Even if this clause is not expressly included, the duty to cooperate is normally implied by law. Stewart Sleep Center, Inc. v. Atlantic Mut. Ins. Co., 860 F. Supp. 1514 (M.D. Fla. 1993).

The purpose of an insured’s duty to cooperate with the insurer in the adjustment of the claim serves multiple purposes beneficial to both the policyholder and the insurer. The obligation is important to the insurer because it gives the insurer an opportunity to collect important facts and details while the information is still fresh on everyone’s mind. It also helps the insurer make an informed coverage decision and prevent fraudulent claims.

The duty of cooperation after a loss does not only run from policyholder to insurer. It also runs from the insurer to the policyholder. Adjusting the loss with the insured cannot be accomplished if there is no duty of cooperation on the part of the insurer. Cooperation between the insurer and the policyholder helps the claim determination be made quickly and causes the claim to be paid for fairly. As is the case if an insured breaches his post-loss obligations, an insurer that fails to cooperate with the policyholder during the adjustment of the claim may breach the contract and be liable for damages.

Attempting to summarize the cooperation clause in one blog post would be inadequate. Therefore, over the next few weeks I will write about this important aspect of law and some of the nuances which it entails.

Under those same set of facts, if our wannabe Emeril Lagasse fails to properly mitigate those same fire damages, coverage could be reduced or even avoided all together by the insurer.

The general rule in insurance law is that a policyholder’s prior actions will not necessarily void coverage for a loss, even if that loss is directly caused by the negligence of the individual. After the loss, however, failing to take the appropriate measures to mitigate could lead to an increase in the amount of damages and may substantially reduce coverage or even eliminate it in some instances.

In a fire loss, for instance, the insured should make sure to remove any undamaged property if there is a question about the stability of the walls in that particular area. This was the exact situation that one court addressed in Suttir v. Indemnity Co. of America, St. Louis, Mo,. 226 Ill.App. 214, (1st dist. 1922). In this case, the Court refused to hold an insurer liable for damage to a car that occurred when the walls around it collapsed as a result of previous fire damage. The Court reasoned that the insured knew the walls of the building might collapse and had failed to properly mitigate the damages by moving the automobile to a different location. Therefore, the insurer should not be responsible for the further damages.

The exact consequences of a failure to mitigate are determined by the terms of the policy as well as the particular jurisdiction. Normally, the damages that result from the failure to mitigate the loss may not be covered, leaving the insurer responsible for only the original damages. A Louisiana court followed this partial recovery theory when a policyholder’s roof was damaged by wind and the house suffered periodic water damages over a long period of time. Higginbotham v. New Hampshire Indem. Co., 498 So.2d 1149 (La.App. 3 Cir.1986).

In Higginbotham, the Court held that although the insurer was responsible for the cost of replacing the roof, the policyholders were liable for damages sustained after the storm “where measures could have been taken to reasonably protect the premises from further deterioration.”

A similar decision was reached in Texas, when one court was asked to determine whether the duty to mitigate damages was a condition precedent to recovery, meaning that coverage was void if the appropriate steps were not taken. Fortunately for the policyholder, the Court found that “the failure to mitigate damages is an offset to recovery under the generic homeowners policy, and the district court erred and abused its discretion when it instructed the jury that mitigation was a condition precedent to recovery.” Carrizales v. State Farm Lloyds, 518 F.3d 343 (5th Cir. 2008).

There are cases in which a failure to mitigate may void coverage completely. Some courts have found that where the cooperation clause requires an insured to exercise all reasonable means to protect, safeguard, and salvage property, there is a possibility that the policyholder could void coverage altogether if this is not done. See Slay Warehousing Co., Inc. v. Reliance Ins. Co., 471 F. 2d 1364 (8th Cir. 1973).

Regardless of whether coverage is lessened or outright forfeited, these cases all have one thing in common – the problem could be avoided. Generally after loss, the first thing on an insured’s mind is not “how can I mitigate these damages, and have I done enough to comply with my obligations under the policy.” In fact, most insureds do not even know what the cooperation clause is, and who can blame them? How many people spend their lives immersed in insurance case law and treatises?

This is why it is important for homeowners to have professionals working for them as quickly as possible after the loss. Whether it is a public adjuster, attorney, or water remediation specialist, having someone there to guide you and make sure things are done properly can be priceless in the end.

1. Read the Policy.

The insurance policy is a contract between the carrier and the insured, and claim is governed by that contract. You must read every single word of the contract to know exactly what is in there. Is it an all-risk policy or named-perils policy? Is any part of the claim excluded or limited and, if so, is there an exception to the exclusion? Does the insured have to submit a proof of loss within sixty days of the loss or is it by request? Is the language of pertinent provisions clear or ambiguous? In a recent Georgia case where a frozen pipe burst and flooded a building, I discovered that the standard vacancy provision which excluded the claim was a little garbled. Whoever typed up the policy had inadvertently transposed a few words, changing the meaning of the provision entirely. Because the provision was rendered ambiguous, it was interpreted to provide coverage for the otherwise-excluded claim. It is important to read each provision carefully, keeping in mind the specific facts of your case.

2. Know the Law in Your Jurisdiction.

Even basic principles can vary from state to state. For example, a policyholder making a claim under an all-risk policy in some states only has to show that he has incurred a loss. The burden then shifts to the carrier to show that the claim is not covered or excluded. However in some states, the burden of proving the claim is always on the insured. Know the law in your state and, if you have a multi-jurisdictional practice, take the time to learn the law of states where you practice. Don’t assume the law is the same everywhere.

It is also important to thoroughly research the law regarding the particular provisions that apply to your case. For example, in one of my Texas cases, the claim was clearly excluded by a provision that related to the cause of the loss. However, the exclusion contained the phrase, “An ensuing loss will be covered.” After researching the definition of “ensuing loss”, I found that, although the phrase has not been legally defined in many states, Texas case law had given that term a specific meaning which excepted my client’s claim from the exclusion. It pays to research the issues in your case.

3. Get and Put Everything in Writing.

Every event in the case should be documented in writing. For example, although most policies require notice of the claim to be in writing, most policyholders give the carrier notice of the claim simply by telephoning their insurance agent. That may or may not constitute proper notice under the laws of your state. (See Basic Rule No. 2). Unless proper written notice has been given, follow up with a written notice of the claim.

All oral discussions, offers, demands, and agreements should be confirmed in writing. For instance, you may write: “This confirms that you will inspect the loss at 2 p.m. on Friday the 19th”, or “This confirms our conversation where you told me that you will provide your estimate to me within two weeks.” Every conversation should be documented. The insurance company is documenting every event in the claim --- the adjuster makes an entry in a computerized log describing every conversation and event in the claim, in a way that ultimately looks favorable to the carrier. Contemporaneous logs or diaries are powerful evidence in court. Your documentation may be used later to counter the insurance company’s version of the events. The insured should have his/her own documentation showing that, for example, the adjuster didn’t show up at the agreed time or failed to provide the estimate as promised. Such documentation serves to refresh the memory of those who later disagree as to what was promised or done.

4. Cooperate with the Insurance Company.

The insurance policy places certain duties on the insured when there is a loss. If the insurance company requests it, the insured must provide documentation, submit a proof of loss, and submit to an examination under oath. In most states, cooperation is a condition precedent to recovery on the claim. The insured should comply with all reasonable requests promptly. If the insured fails to fully cooperate, it can seriously impact his recovery on the insurance claim.

The scope of the insured’s duties can be determined by reading the policy (Basic Rule No. 1) and knowing the law (Basic Rule No. 2). For example, the policy may state that the insurance company can examine only the insured, or it can also state the insurance company can examine the insured as well as all of its employees. The policy will specifically spell out the policyholder’s duties when there is a claim. (See Basic Rule No. 1). You should research the law in your jurisdiction to determine the full extent of the insured’s obligation regarding documentation, examinations under oath, and the proof of loss. (Basic Rule No. 2).

5. Be Proactive.

The insured, and/or her representatives, should act affirmatively to push the claim forward. It is not enough to simply wait for the insurance company to finish its investigation. One of the most important steps is to document the claim thoroughly. If, for instance, the damaged property is being repaired, it should be extensively photographed before, during and after repairs. The insured should prepare an estimate of the damages independently of the insurance company’s estimate. All documentation regarding the claim --- like financial statements for a lost profits claim --- should be gathered and assembled before the insurance company requests them.

The insured should send a pre-suit notice letter if such is required in the jurisdiction (See Basic Rule No. 2). The insured should set time frames and deadlines for the insurance company to follow. For instance, it is fair to demand (in writing --- Basic Rule No. 3) that the insurance company keep the insured updated on the investigation. For example, if the insurance company had an engineer inspect the property, why doesn’t the insured have a copy of the report six weeks later? Be persistent in following up with the adjuster --- the squeaky wheel gets the grease. This will ensure that the claim moves along without delay.

An attorney colleague of mine, Arden Lea, asked me to co-counsel with him on a case where the cooperation clause was a central issue. He coined a phrase which I often use and teach regarding the definition of cooperation. He indicated that it does not mean “slavish obedience.” He is right. If you seek a definition of the word “cooperation,” the idea of those working together, such as in a team, for a mutual benefit seems to best define the word. If the insurer had placed the word “obey” into the policy, the entire purpose of the mutual good faith performance of an insurance policy would be changed.

A case decision last month, Coconut Key Homeowners Ass'n v. Lexington Ins. Co., No. 08-60640, 2009 U.S. Dist. LEXIS 83652 (S.D. Fla. Aug. 28, 2009), demonstrates the very high burden that insurance companies have to prove regarding the policyholders failure to cooperate before coverage is denied on that basis.

The alleged failure to cooperate apparently centered on the condominium not providing access to all the units damaged by wind. Here is what the Court found regarding the “cooperation clause” and burden of proof required to show a breach of such a requirement:

Most insurance policies have "cooperation clauses" providing that the insured "shall cooperate with the insurer, attend hearings and trials upon the insurer's request, and shall assist in effecting settlements, in securing and giving evidence … and in the conduct of suits."… Cooperation clauses are less onerous on insured parties because courts will reject defenses based on alleged material breaches of cooperation clauses if the insurer cannot demonstrate "substantial prejudice" from the breach. While "an insurer need not show prejudice when the insured breaches a condition precedent to suit,"… the burden is "on the insurer to demonstrate substantial prejudice before a breach [of a cooperation clause] would preclude recovery under the policy."…

Case law regarding insurance policies indicates the inspection provision at issue in this case is a cooperation clause. First, the inspection provision helps Lexington obtain evidence, which is one of the key purposes of cooperation clauses identified above. Second, Lexington has not presented a case indicating that inspection provisions are typically considered to be a condition precedent, nor has the Court identified any Florida case suggesting Lexington's assertion that the provision is a condition precedent could be correct. Finally, the rule that "policy provisions limiting liability are to be construed in favor of the insured," State Farm Fire and Cas. Co. v. Metropolitan Dade Cty., 639 So.2d 63 (Fla. 3rd DCA App. 1994), weighs in favor of holding the provision is a cooperation clause because a holding that the provision is a condition precedent would make it harder for Coconut Key to recover.

As a result, to prevail on its motion for summary judgment, Lexington must show as a matter of law 1) that Coconut Key materially breached the inspection provision, and 2) that Lexington has been substantially prejudiced as a result of that breach. (emphasis added)

The fact pattern and issues of cooperation seem growing and numerous in other cases that I am aware. Condominiums are trying to prove that windstorm damages occurred and insurers are trying to disprove the same. Accordingly, the facts the Court noted are also important for many fighting damages in hurricane or other windstorm claims:

Here, Coconut Key has presented sufficient evidence for the jury to decide whether it has sufficiently cooperated with Lexington to allow Lexington adjusters to inspect the premises. The parties do not dispute that Coconut Key has extended invitations for re-inspection four times. Furthermore, the record presented to the Court indicates the blame for Lexington's inability to access units lies chiefly with unit owners and there is no evidence that Coconut Key can compel the owners to assist Lexington. As a result, Lexington has not shown as a matter of law that Coconut Key has materially breached the inspection provision.

…

Even if it could demonstrate Coconut Key's material breach as a matter of law, Lexington could not prevail unless it could also establish substantial prejudice resulting from its inability to access the units at issue. While it may be possible that Lexington needs access to the units at issue to address particularly contentious damages issues, Lexington has not offered any evidence showing that a meaningful amount of Coconut Key's damages are located in the inaccessible units or explained why it must access each and every unit to respond effectively to Coconut Key's claims. Furthermore, Lexington's assertion that it has not found any additional damage to unit interiors during re-inspection tends to shows that its inability to access the remaining units has had little impact on its assessment of Coconut Key's claimed damages. Accordingly, Lexington's motion also fails because it has not come forward to demonstrate substantial prejudice. However, if it chooses to do so, Defendant obviously still can present evidence on this issue at trial.

I suggest that policyholders work with the insurance company to provide information for the insurer so that payment can be made as quickly as possible. Similarly, insurance adjusters should work with and assist the policyholder to get as many benefits which are owed to the policyholder following the loss.

It is my impression that there is a growing trend in claims where delay ensues; the policyholder asks for money; months go by; and then the insurance company demands all kinds of information and access that it should have started on Day One. Then, when the policyholder asks why the insurance adjuster did not ask for the information or do the work much sooner, the question is answered with a harsh letter threatening a lack of coverage for a long list of reasons which include the failure to cooperate.

While not the case all the time and maybe I would have a different impression if I were an adjuster, it seems that many adjusters are not being taught that cooperation means working with, and not against, the customer of the insurance company.