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

During a break in my presentation at the NAPIA annual conference, Depreciation Should Not Be Taken for Partial Losses That Are To Be Repaired, Dick Tutwiler, a very experienced public adjuster, approached me regarding an ethical obligation he felt I overlooked in the discussion of ethical adjustment of glass door and window claims. He explained:

Public Adjusters have an ethical obligation to submit claims only after conducting a reasonable and honest investigation. Many older glass doors and windows have normal wear and tear and pre-existing loss issues which require the public adjuster to investigate the pre-existing nature of the items rather than to simply submit a claim for all damage seen.

His point is well taken. Adjustment requires investigation and evaluation of damage as well as coverage. Adjusters, whether for the public or the insurance company, are ethically obligated to complete these two primary duties of adjustment. Public adjusters should not place their policyholder clients in the position of having to explain or answer for fraudulently appearing claims without merit because of poor or non-existent investigation into the prior nature of items before a loss occurred.

I neglected to mention this very important point. There is a concern from many leaders in the public adjustment field that the poor work of some creates a public perception that public adjusters care about one thing--how big the claim can be made. A public adjuster’s job is to accurately determine the full amount of the insured's loss. Ethical public adjusting is not a wrongly evaluated claim amount following a cursory investigation. I am certain most professional public adjusters feel the same way and expect their colleagues to perform to this standard or get out of the business in order to maintain the integrity of the profession.

Most public adjusters active in NAPIA and FAPIA have expressed Tutwiler’s concern in a number of different ways. I should have addressed it better in my recent speeches in Florida, Texas and California.

On another note, Sandy Burnette correctly made a comment where I went too far. In response to my post, Is the State Farm Policy Really Worth Anything?, Sandy Burnette made the following observation:

"While I try to resist responding to all your posts, and it sometimes takes quite a bit of restraint to hold myself back, once again I find you have crossed the proverbial line.

Your opening sentence questioning "what is the value of insurance if it doesn't cover an insured loss" is beyond misleading, it is simply untrue. By definition, an "insured loss" is covered.

Suggesting that "insured losses" are not covered by insurance companies is an oxymoron. (Yes, claims are often wrongfully denied. But we have courtrooms to make sure that is corrected.)

It makes for sensational reading when you write those things and it creates a platform for you to once again rail at insurance companies, but unfortunately it just isn't true. This post is nothing more than an expression of the belief that anything bad that happens to somebody "ought" to be covered by their insurance policy."

His comment went on far beyond this quote, but that point is well taken. I wrongly wrote the following line in the context of that post:

"What is the value of insurance if it does not pay for insured losses?"

That is a great and accurate line I have often used in bad faith cases, but not accurate where there is no coverage. I should have written:

"What is the value of insurance if the policyholder is not informed that it will cover only a few losses? How would the public perceive the value of State Farm's product if it fully advertised its positions of what is not covered under the product?"

I think the point is obvious--the value is far less. The security advertised by State Farm in no way reflects how State Farm writes exclusions into its product. Some may say that the ads are disingenuous because they do not adequately warn State Farm policyholders about the common accidental risks of loss that State Farm excludes in its product form. That was my point.  

Policyholders and the public should be made aware of this in advance rather than after purchasing the product or after the loss when it is too late to do anything about it.

I do not want State Farm to be run out of business. As the industry leader, I would hope that somebody in its very able and bright management would critically review these issues. If State Farm changes, many other carriers will do the same. If not, I hope that others with me will raise the issue and make State Farm change through public policy or by purchasing from insurance companies that do not provide false promises of security.

There are other responses to Burnette's comment that need a reply in a later post. I will try to do better in expressing my opinions and not forgetting information. Thanks to all who comment.

We discussed the practice of taking depreciation in partial loss situations for structural damage that is to be repaired. I recently posted in, "Do Not Take Depreciation to Determine Actual Cash Value of Partial Loss to Real Real Property in Texas," that some Texas case law indicates depreciation should not be taken on partial losses. Wilkofsky was adamant that depreciation should not be taken and explained that long standing New York precedent prevents it.

Indeed, in Lazaroff v. Northwestern National Insurance Company, 121 N.Y.S. 2d 122 (N.Y.S. Court 1952), the New York Court, citing previous opinions, held:

"The Court is of the opinion that the defendant's obligation is to reimburse the plaintiff for the cost of repairs with materials of like kind and quality damaged without deduction for depreciation."

It seems straightforward. So, why do the vast majority of New York insurers deduct for depreciation of structural damages destined for repair?

Papa suggested that, from a practical standpoint, it is simply easier to resolve differences with the insurer through blanket payments rather fight on these individual items. He noted that most insurance company field adjusters are taught to take depreciation despite the contrary law.

Papa and Wilkofsky explained that a New York Pattern Jury Instruction reveals that depreciation is not an issue when a structure is to be repaired, contrary to the practice of most insurance adjusters:

"Under the policy language, the cost of (repair, replacement) that you may consider is the cost of (repair, replacement) with material like kind and quality within a reasonable time after such loss. In that calculation, you are concerned only with the cost of restoring the building to its condition prior to the fire, and depreciation plays no part."

I suggest that policyholders and insurers carefully check the law in their jurisdiction and determine whether depreciation should be held back on partial losses where repair is contemplated. While many insurance companies routinely take the deduction and make money playing the float, it does not mean it is a legal or good faith practice.

The format of the seminar seemed to work very well, so once again we expect this event to be very interactive. The agenda will include the following topics:

• TWIA Issues – Status of Litigation, Whistleblowers, Overhead & Profit, Flood, Depreciation, Co-operation
• Causation and Sufficient Proof, Texas-style—It’s Different Here
• Valuation – Estimates That Have Impact and Hold Up in Appraisal or in Court
• Update on TAPIA
• Expert Panelist Analysis—Topics: Wind Speeds, Roof Damage, Wall Damage, Flood vs. Wind Damage, Sliding Glass Door or Window Damage, and Wind-driven Rain

The conference will begin with registration at 7:30 am and conclude at 2:00 pm. To register and receive additional details, you will need to go to www.adjusterlife.com. Please register by May 28, 2009.

This is an invitation-only event for Texas-licensed public adjusters. Be sure to register today, and please bring your Texas Public Insurance Adjuster license with you to the seminar.

It’s been nearly nine months since Hurricane Ike. Both Merlin Law Group and you, the public adjuster, have been working hard to hold insurance companies accountable so that policyholders see the results to which they are entitled.

Merlin Law Group is pleased to once again provide this free seminar as an opportunity to share knowledge we have gained by serving our clients and each other.

The general rule for determining loss payment where a deductible applies is:

Total amount of covered loss less deductible, subject to the policy limit. If the amount of the damage-- minus the deductible-- is greater than the policy limit, the insurance company's liability is only the policy limit. The policy limit is the amount of coverage purchased.

I am writing this because of a recent Texas Appellate insurance case, Bruton v. Underwriters at Lloyd's, London, 2009-TX-0407.431, 2009 Tex. App. LEXIS 2189 (Tex. App. April 2, 2009).

Our firm's computerized legal research supplier, LexisNexis, summarized the case as follows:

“The insured's trailer damaged, and a claim was reported to the insurer. It was determined that the trailer was totaled due to the amount of damage, and it was placed up for salvage bids and sold. However, the insured wanted the trailer back. He filed a lawsuit against the insurer and others. Judgment was entered for the insured in an amount less than what he sought, and this appeal followed. In reversing, the appellate court determined that the trial court erred by holding that the insurer obtained equitable title to the trailer upon tendering payment of the policy limits. Although the insurance policy unambiguously provided the insurer with the right to take possession of the property, the policy failed to mention when that right attached. There was nothing in the policy that would have put the insured on notice that once the insurer tendered him a check, he would have lost all rights to his property. Because the appellate court was to resolve any ambiguity in favor of the insured, the insurer did not have the right to sell the trailer until the insured had negotiated a check and executed a power of attorney.”

This scenario interested me because we commonly encounter situations where insurers try to take salvage when they are not entitled. Commercial insurance policies typically allow the insurer to take salvage on personal property when they pay the full agreed value of the article. The situation is different if the insurer does not pay full value, where the policy does not allow for salvage, or where the policy limits for property is less than the value.

I almost fell out of my chair when I read how the parties in Bruton calculated a policy limit case. It is simply wrong, although that was never an issue in the case; when issues are not raised, judges have no reason to question them. These facts relate to the deductible issue:

“Bruton…bought a…trailer in August 1999 for $12,500 [This amount reflects a subtraction from the total price of $ 19,300 for the trade-in value of a 1969 Hobbs trailer]. Soon thereafter, he purchased a $10,000 insurance policy for the trailer from Underwriters. Around October 17, 2001, the trailer tipped over. Bruton reported a claim to Underwriters and advised them that certain repairs were necessary for the trailer to dump again.

The adjuster, employed by Marshall Contractors, Inc, determined that the cost to repair the trailer would be approximately $14,600. Based upon this estimate, Marshall Contractors, Inc. declared the vehicle totaled and through its agent, Rocky Engblad, placed the trailer up for salvage bids.

On October 31, 2001, Bruton received payment in full under the policy in the amount of $9,000 [$10,000 (policy amount) - $1,000 (deductible)].”

The policyholder should have insured the trailer for $19,300, assuming this was the fair purchase price and the trade-in was fair. At a minimum, assuming the trade-in had no value, the insurable value should have been $12,500.

The repair value of $14,600 is the basis to then determine whether the repair costs exceed the value of the trailer. The facts are not clear regarding the value of the trailer at the time of the loss. Generally, the insurer pays the lower of the cost to repair or the value of the damaged article less the deductible—subject to the policy limit.

In this case, the Court is wrong to indicate that Bruton received “payment in full under the policy.” He received $1,000 less than the amount available under the policy. He should have been paid $10,000, the policy limits, so long as the repair costs and the value at the time of the accident were greater than $11,000.

This is often referred to as “absorbing a deductible.” For all adjusters studying this, and those that want to point out that they have been wronged, there is an excellent discussion in Property Loss Adjusting (Insurance Institute of America 3rd Ed 2004), section 2.17.

I wonder if Bruton’s attorney knows that his client may have been shorted $1,000? What if it were a large commercial loss with a million dollar deductible? If you are a policyholder with a complex loss, consult somebody who knows what they are doing.

Anticipating that this post may cause an uproar in the insurance community, as it likely will be copied and sent to those same Texas adjusters, I will simply quote Texas cases on the rule. These cases were instances where judges were faced with this issue in partial loss situations.

In Gulf Ins. Co. v. Carroll, 330 S.W.2d 227, 233 (Tex. Civ. App. Waco 1959), the Court discussed this issue at some length. The Court first quoted the policy language:

"* * * Liability hereunder shall not exceed the actual cash value of the property at the time of loss ascertained with proper deduction for depreciation; nor shall it exceed the amount it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss."

This is the fairly simple actual cash value language still followed in some fashion in most policies. The Court then started its analysis:

"... The second clause would apply to an insured standing in the shoes of the plaintiffs where they have sustained a partial damage to their building. Plaintiffs elected to fix their damages under the latter clause. They did it by pleading their partial loss and by tendering proof as to the reasonable cost of such repairs, using material of "like kind and quality." The Court submitted the damage issue, absent the burden of proof clause, substantially: What sum of money, if any, would be the actual and necessary cost of repairing and replacing the plaintiffs' property so damaged, if any, with material of like kind and quality within a reasonable time after such loss, if any? And the jury answered, $850. The record shows without dispute that repairs to a house under such conditions cannot be made without using new material, and we think the appellant's criticism of the Court's charge in this behalf is strained and without any justification whatsoever.

...
"We are not in accord with this view of the contract. First of all, the property was not destroyed and it needed only to be repaired. It is without dispute that the damage could be repaired only by the use of new material of like kind and quality. In the second place, we see nothing in the liability clause to indicate that a deduction for depreciation is required to be applied to the damage accruing for repairs made under the second clause, and we so hold. We have found no case in the books expressly touching upon this exact situation. The nearest cases are: Texas Moline Plow Co. v. Niagara Fire Ins. Co., 39 Tex.Civ.App. 168, 87 S.W. 192, er. ref.; and [*234] Southern National Ins. Co. v. Wood, 63 Tex.Civ.App. 319, 133 S.W. 286. See also Fidelity & Guaranty Fire Corporation v. Ormand, Tex.Civ.App., 62 S.W.2d 675, w. dis.; Maryland Motor Car Ins. Co. v. Smith, Tex.Civ.App., 254 S.W. 526, n.w.h.

In 45 C.J.S. Insurance § 915, page 1014, we find this statement of the rule:

"If the value is to be arrived at by replacement or reproduction cost, it has been held that depreciation may not be deducted from the cost of replacement and restoration."

In Third National Bank v. American Equitable Ins. Co. of N.Y., 27 Tenn.App. 249, 178 S.W.2d 915, certiorari denied by Supreme Court, we find this statement of the rule, Pt. 14, at page 925 of 178 S.W.2d:
"While replacement cost is a dominant factor in fixing the amount of recovery for total loss of a building, it plays an even greater part in fixing the amount of recovery for a partial loss to a building. It would seem that the only practical way to measure the extent of partial damage to a building would be to inventory its damaged parts, and the only way to express such damage in terms of money would be to count the cost of replacing such parts, so as to restore the building to the same condition it was in just before the fire. And the view which we think supported by the better reason and the greater weight of authority is that HN3depreciation may not be deducted from such cost because that would make the sum insufficient to complete the repairs and would leave the building unfinished; and this would fall short of the indemnity contracted for in the policy." Citing many cases." 

Carroll, 330 S.W.2d at 233

This decision was approved by a subsequent case, Farmers Mut. Protective Asso. v. Cmerek, 404 S.W.2d 599, 600-601 (Tex. Civ. App. Austin 1966), which stated:

"We believe that appellee properly proved his loss, by proving the amount it would cost to repair or replace the property in accordance with a provision of the policy for the limitation of liability, which is as follows: "Subject to Article 6.13 of the Texas Insurance Code, 1951, as amended, liability hereunder shall not exceed the actual cash value of the property at the time of loss, ascertained with proper deduction for depreciation; nor shall it exceed the amount it would cost to repair or replace the property with material of like kind and quality within a reasonable time after the loss, without allowance for any increased cost of repair or reconstruction by reason of any ordinance or law regulating construction or repair, and without compensation for loss resulting from interruption of business or manufacture; nor shall it exceed the interest of the insured, or the specific amounts shown under 'Amount of Insurance.

...

The insurer is not entitled to a deduction for depreciation in the event of a partial loss, as distinguished from a total loss. In Gulf Insurance Company v. Carroll, Tex.Civ.App., 330 S.W.2d 227, n.w.h., a case very much like the instant case, discussed in detail the authorities in cases of this character and we do not deem it necessary to review such." (emphasis added)

A more recent federal case involving a broken sewer and plumbing, Unity/ Waterford-Fair Oaks v. Fireman's Fund Ins. Co., 2001 U.S. Dist. LEXIS 24818 (W.D. Tex. June 20, 2001), followed the same rule in a partial loss situation:

"In the context of the language relating to damages in the Fireman's Fund policy, it is proper to measure damages for a repairable injury to a building as the amount necessary to restore the building to its condition immediately prior to the injury. See Imperial Ins. Co. v. Nat'l Homes Acceptance Corp., 626 S.W.2d 327, 329-30 (Tex. App.--Tyler 1981, writ ref'd n.r.e. Ins. Co. v. Nat'l Homes Acceptance Corp., 626 S.W.2d 327, 329-30 (Tex. App.--Tyler 1981, writ ref'd n.r.e.)."

My suggestion to Texas policyholders not being paid under this rule of law is to copy this post, send it to your adjuster, and ask for your money or why the insurance company is not following this law.