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

The policyholder in Clena Investments retained a professional engineer to offer opinions on the cause of damage to the property and the costs of repair. The policyholder’s expert earned a Master–of–Science degree in civil engineering from the University of Miami and worked as an engineer and project manager on various design and construction projects since 1997. Part of the expert’s conclusion was:

[T]he existing damages of the roof and, in turn, the interior leaks, are likely due to high winds activity in recent years. Hurricane Wilma likely caused the existing roof damages and interior leaks at the Property. The effect of such winds on the parapet wall, flashing and edge roof membrane and also on the air plenums and air condensing units created the proper conditions for water and air intrusion under the roof membrane. Continuous water and air infiltration has been undermining the membrane, metal deck and overall roof structure.

His report contained a comparison between Hurricane Wilma and previous storm activity in South Florida. In his deposition testimony, the policyholder’s engineer explained his conclusion that Hurricane Wilma, not Hurricane Frances, inflicted the damage also stemmed from his reasoning that if the cracking and holes in the roof membrane had existed when Hurricane Frances occurred, the roof membrane would have been peeled off by Hurricane Wilma.

The insurer focused its attacks on the expert’s qualifications. The insurer also argued that the methodology the expert used was neither reliable nor helpful and urged the Court to preclude him from rendering that opinion. The insurer also challenged the expert’s opinion regarding the cost of repairing the damaged property.

To resolve the challenge to the expert’s opinion testimony, the Court explained it conducts a “rigorous” three-part inquiry into whether: (1) the expert is qualified to testify competently regarding the matters he intends to address; (2) the methodology by which the expert reaches his conclusions is sufficiently reliable; and (3) the testimony assists the trier of fact, through the application of scientific, technical, or specialized expertise, to understand the evidence or to determine a fact in issue.

When conducting this analysis, federal courts have a fine line to walk to ensure they are not making ultimate conclusions that are reserved for the trier of fact. In reaching its decision, the Court analyzed the factors above. The Court denied the insurer’s motion to the extent that it sought to strike the expert’s opinion that Hurricane Wilma most likely inflicted the damage to the property, finding the expert’s experience and training made him competent to testify to that conclusion.

It can be devastating when an expert is not allowed to testify or when expert testimony is limited. In many cases, a substantive amount of time and money is spent long before the expert will be challenged in court. Avoiding subjective or speculative leaps in the methodology or basis for conclusions will help to withstand the inevitable attack.

Insurers almost always challenge the insured’s experts and the admissibility of those experts’ opinions at trial by filing a “Daubert” motion requesting that the court disallow expert opinions. Experts retained by policyholders and their lawyers should always be aware of the Federal Rules of Evidence regarding admissibility of expert opinion, and the Daubert factors. This is especially so when writing the expert report. Failure to do so may cause your expert opinion to be disallowed at trial—causing a huge blow to the insured’s case, and a waste of time and money.

The trial court has broad discretion in admitting evidence under Federal Rule of Evidence (“F.R.E.”) 702, and the Daubert factors are helpful but not definitive. F.R.E. 702 provides:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

(a) the expert's scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.

Under F.R.E. 702, a trial judge must ensure that scientific testimony is both relevant and reliable. Kumho Tire Co. v. Carmichael, 526 U.S. 137, 147 (U.S. 1999); Daubert v. MerrellDow Pharmaceuticals, Inc., 509 U.S. 579 (U.S. 1993). Rule 702 essentially codifies the principles declared in Daubert and the cases which follow it, which require expert testimony be reliable before it may be admitted. Rule 702 does not subject expert witnesses to the evidentiary requirement of first hand knowledge because of the supposition that an expert’s opinion will have a reliable basis in the knowledge and experience of the expert’s discipline. Daubert, 509 U.S. at 592.

The determination as to the relevance and reliability of expert testimony is committed to the discretion of the trial court. Goebel v. Denver & Rio Grand Western Railroad Co., 215 F.3d 1083, 1087 (10th Cir. 2000). The trial court judge must therefore act as a gatekeeper to ensure that expert testimony is both reliable and relevant. Khumo at 147; Alfred v. Caterpillar,Inc., 262 F.3d 1083, 1086 (10th Cir. 2001). “The gatekeeper inquiry under Rule 702 is ultimately a flexible determination, keeping in mind that rejection of expert testimony has been the exception rather than the rule.” Ruff v. Ensign-Bickford Industries, Inc., 171 F. Supp.2d 1226, 1232 (D. Utah 2001) citing Goebel, 215 F.3d at 1089. This is also consistent with the U.S. Supreme Court’s recognition that, on balance, a jury should be presented with the necessary relevant evidence it needs to resolve issues unfamiliar to it, and that any prejudice arising from the so-called “suspect” nature of that evidence can be overcome by vigorous cross-examination and careful instructions. Daubert, 509 U.S. at 596.

Once hired as an expert, you must make sure your investigation, report and the opinions you will give at trial can stand up to scrutiny under criteria set forth in Daubert.

In Colorado and the Tenth Circuit, the courts apply Daubert as four nonexclusive factors that may be considered by the trial court in assessing the reliability of the expert's opinion: (1) whether the opinion at issue is susceptible to testing and has been subjected to such testing; (2) whether the opinion has been subjected to peer review; (3) whether there is a known or potential rate of error associated with the methodology used and whether there are standards controlling the technique's operation; and (4) whether the theory has been accepted in the scientific community. Hauck v. Michelin North America, Inc., 343 F.Supp.2d 976, 980 -981 (D. Colo. 2004). “The gatekeeper inquiry under Rule 702 is ultimately a flexible determination. But we specifically hold that a district court, when faced with a party's objection, must adequately demonstrate by specific findings on the record that it has performed its duty as gatekeeper.” Goebel, 215 F.3d at 1088.

However, the U.S. Supreme Court has directed courts to look beyond the analysis
identified in Daubert, making it clear that there are categories of expert testimony that should be admitted even if they do not meet the Daubert criteria. In Kumho Tire, the U.S. Supreme Court expressly reviewed the law concerning admissibility of evidence of “specialized knowledge” following Daubert. The Court noted that many types of specialized knowledge lie outside traditional scientific previews and are necessarily based on personal knowledge or experience, such as handwriting analysis, criminal modus operandi, land valuation, and other areas of expertise not amenable to precise scientific testing. Kumho Tire, 526 U.S. at 150. Thus, the Court noted, Daubert’s list of factors can only be “helpful, not definitive,” and the trial court should be granted “considerable leeway in deciding in a particular case how to go about determining whether particular expert testimony is reliable.” Id. at 151-152; see also Hauck, 343 F.Supp.2d at 981 (“The list is not exclusive, and district courts applying Daubert have broad discretion to consider a variety of other factors.”).

Experts—Keep In Mind:

1. Can I show I have the knowledge, skill, experience, training or education to express this opinion (or these opinions)?
2. Is my methodology reliable and recognized by other experts in the field?
3. Have I defined the methodology precisely in my report?
4. Did I employ that methodology in this specific case?
5. Is my opinion based on sufficient facts and data?

Your belief based on your experience and expertise in your field is not sufficient.

Although an expert witness is permitted wide latitude in offering opinions, including those which are not based on first-hand knowledge or observation, the opinions must have a reliable basis. Under Rule 702, admissible expert testimony must be based on actual knowledge and not subjective belief or unsupported speculation.

Squires ex rel. Squires v. Goodwin, No. 10-CV-00309-CBS-BNB, 2011 WL 5331583 (D. Colo. Nov. 7, 2011) quoting Mitchell v. Gencorp, Inc., 165 F.3d 778, 780 (10th Cir.1999).

Keeping the above in mind during each of your expert investigations and in writing reports will ensure your continued good reputation and record at trial.

Insureds who have just suffered a large property loss are often not in a financial position to hire public adjusters on an hourly fee, or even flat fee basis. For this reason, public adjusters often have contingency fee contracts with insureds, where the public adjuster receives a percentage of the insurance proceeds as payment for adjustment services after the insured finally receives payment from the insurance company. It follows that, the larger the insurance proceeds recovery, the larger the payment to the public adjuster. This arrangement creates problems if the public adjuster is needed in litigation to offer an expert opinion.

Courts in many state and federal jurisdictions have held that contingency fee arrangements for expert witnesses are against public policy. See Accrued Fin. Servs. Inc. v. Prime Retail, Inc., 298 F.3d 291, 300 (4th Cir. 2002). Consequently, many courts have rendered decisions excluding the testimony of such experts. See City & County of Denver, Colo. v. Bd. of Assessment Appeals of State of Colo., 947 P.2d 1373, 1374 (Colo. 1997) (person may not act as appraiser or expert witness and present expert testimony under contingent fee agreements); Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 73 (2d Cir. 1990) (excluding an expert's testimony as a result of the fact that he had been retained by the plaintiff on a contingency fee basis); Farmer v. Ramsay, 159 F.Supp. 2d 873 (D. Md. 2001) (excluding an expert's report and testimony as a result of his improper contingency fee arrangement with the plaintiff).

Courts reason that such expert opinion must be excluded because the contingent fee arrangement gives the expert a pecuniary interest in the outcome of the proceedings, and to allow the testimony would be against public policy. Belfonte v. Miller, 243 A.2d 150 (Pa. Super. 1968). Courts note the “long established rule of law” that “a special contract to pay more than the regular witness fees in ordinary cases is void for want of consideration and as being against public policy.” Id. at 152 (emphasis in original). Section 552 of the Restatement of Contracts also provides, in subsection (2):

[a] bargain to pay an expert witness for testifying to his opinion a larger sum than the legal fees provided for other witnesses is illegal only if the agreed compensation is contingent on the outcome of the controversy.

Id. at 153 (emphasis in original).

In Everett Cash Mutual Ins. Co. v. Bonnie Sue Gibble et al, No. 01-01,640, 2004 WL 5149339, (Pa. Com. Pl.) (May 14, 2004), the insured sought the assistance of a public adjuster prior to any litigation and signed a “Public Adjustor Contract,” retaining the public adjuster “to advise and assist in the adjustment of the insurance claim,” agreeing to pay a contingent fee comprising a certain percentage “of the amount paid by the insurance companies in settlement of [the] loss and necessary expenses.” During litigation, the insured’s counsel sought to have the public adjuster offer an expert opinion that the insurer “did not follow proper claims practice.” Judge Dudley Anderson issued a trial court order specifically precluding the public adjuster from giving expert opinion because,

In the instant matter, the Court finds Defendants' attempt to segregate [public adjuster’s] work as an expert witness from his work as a public adjustor “merely one of form”. It is also of no consequence that the public adjustor contract was entered into prior to the commencement of litigation. What does matter is that [public adjuster’s] preparation of the expert report followed the commencement of litigation and, as Defendants admit, [public adjuster] will be entitled under the contingent fee agreement to a percentage of any damages awarded for their loss. The Court cannot help but conclude, therefore, that the opinion rendered in the report is “so undermined as to be deprived of any substantial value”. While he may testify as a fact witness with respect to his adjustor role, [public adjuster] must be precluded from giving any opinion as an expert witness.

Clearly, public adjusters, expert opinions and contingency fee agreements don’t always mix. In coverage and bad faith litigation, lawyers and public adjusters must communicate and be aware of lay opinion and expert opinion issues. Lawyers unaware of a public adjuster’s contingency fee contract may be unprepared for motions to strike a public adjuster’s opinions after discovery of a contingency fee contract between the policyholder and the public adjuster. If the public adjuster does not have a contingency fee contract, then the public adjuster may be able to give expert opinion. If the contract is a contingency fee agreement, then the public adjuster is probably limited to giving only lay opinion or fact witness testimony. Proper planning and communication will help ensure the lawyer has designated the proper and necessary experts and disclosed any necessary public adjuster opinions, while taking care to protect those opinions from exclusion.

Recently, in the case of Liprie v. State Farm Fire & Casualty Company, State Farm attempted to strike the policyholder’s expert’s affidavit from the Court record and to exclude that expert’s testimony claiming that it was unreliable. No. 2:09–1607 (W.D. La. September 25, 2011). The case involves a property owned by the policyholder in Big Lake, Louisiana, that was insured by State Farm. On September 13, 2008, Hurricane Ike made landfall on the Gulf coast. On September 19, 2008, the policyholder’s insurance agent contacted State Farm and reported cracks in the ceiling, damage to the roof and various other damage. State Farm inspected the property on October 11, 2008. The adjuster discovered wind damage which caused missing ridge caps and shingles, and siding damage on the rear and front of the house. State Farm paid the insured for additional living expenses incurred as a result of the storm butnot for the wind damage to his residence since State Farm claimed the wind damages did not exceed the policy deductible.

In August 2009, the policyholder sent State Farm a July 20, 2009, report by Charles Norman related to damages caused by Hurricane Ike. The report included an estimate of wind damages totaling over $120,000. In September 2009, State Farm’s adjuster and the policyholder’s representatives met at the property for another inspection. State Farm determined that none of the items claimed as damages were the result of an “accidental direct physical loss,” as required by the insurance policy, and no evidence supported any payment due by State Farm. After the inspection, State Farm adjusted its estimate to account for one additional item of damage to a window that was not previously accounted for, but still determined that the damages did not exceed the hurricane deductible.

State Farm attempted to discredit the insured’s expert opinion by asserting that at the time of the re-inspection in 2009 with the policyholder’s representatives and expert, all of the repairs to the property had been completed. Of particular issue in the damages to the residence, was cracking of the sheetrock and the need for re-leveling the floor under the master bedroom.

The Court stated that it “finds no merit to State Farm’s arguments that [the policyholder’s expert’s] testimony and affidavit should be excluded because the inspection was performed after the repairs were completed, or that [his] opinion was unreliable or untimely.” The court denied State Farm’s motion to strike that affidavit and motion to exclude testimony.

In this case, the Court refused to exclude the expert testimony and allowed the case to proceed to trial for determination of whether the additional damage claims can be attributable to wind from Hurricane Ike. It nonetheless reveals the aggressive strategy employed by State Farm to attempt to attack the policyholder’s expert’s credibility and keep him from testifying in support of the damages claimed.

Sun Tzu was an ancient Chinese military general, strategist and philosopher who said “Invincibility lies in the defense; the possibility of victory in the attack."

Manpower Inc. v. Ins. Co. of Pennsylvania, 08-C-0085, 2011 WL 3904643 (E.D. Wis. Sept. 6, 2011) is a horror story and a lesson to all coverage practitioners.

Manpower, Inc., leased office space in a building located in Paris, France. The building sustained a collapse loss and the collapse caused an interruption in Manpower’s business. Manpower filed a claim for business interruption coverage with its insurer, but the insurer denied the claim and Manpower filed a lawsuit. During the lawsuit, the court decided that Manpower was entitled to business interruption coverage and the only issue before the jury was the amount of the business interruption claim.

Before the trial, the insurer moved to strike Manpower’s accountant under Federal Rule of Evidence 702 (aka Daubert Challenge), claiming that his opinions and formulations were unreliable and therefore inadmissible for trial purposes. The court agreed with the insurer and did not allow Manpower’s expert to testify. The insurer then claimed that without an expert, Manpower could not prevail and that the case should therefore be summarily adjudged.

Manpower’s attorneys advised the court that they would use the insurer’s experts to prove the amount of the loss, a move not recommended for those with heart conditions. To complicate matters, Manpower was not able to compel one of the insurer’s experts to trial so the court had to decide the issue by looking at the deposition transcripts and expert reports.

In reviewing the reports the court found that the insurer “recommends” that the carrier pay no more than €399,821 to Manpower in connection with the claim. Manpower intended to offer this recommendation at trial as to the amount of the business-interruption loss.

The court, however, did not accept the recommendation as a reliable and admissible expert opinion that could have been presented to the jury to support Manpower’s claim.

A fundamental problem for Manpower is that Lewis's “recommendation” is not an opinion that would allow a jury to reasonably determine the amount of Manpower's loss. In the report, Lewis makes clear that he does not have enough information to express an opinion as to the amount of the loss and that therefore he can do no more than critique the calculations performed by Herr Experts and Sullivan. His “recommendation” is merely that—a recommendation to ISOP about how much to pay in connection with the claim in light of the limited information then available. Although this recommendation is an opinion, it is not an opinion that meets the requirements of Federal Rule of Evidence 702, and ISOP never intended that it serve as one. Indeed, Lewis explicitly states at various points in the report that he does not have sufficient facts or data to render an opinion as to the amount of the loss. Moreover, during his deposition, Lewis repeatedly states that he does not have an opinion as to the amount of the loss.

Manpower points to an excerpt from the deposition in which Lewis is asked about his “determination” of the amount of the business-interruption loss based on certain assumptions. Manpower argues that in this excerpt, Lewis is offering an opinion as to the amount of the loss. However, even if he were, that opinion would be inadmissible under Rule 702 because it is merely the “recommendation” discussed in the previous paragraph, which was not based on sufficient facts or data. Moreover, the cited excerpt appears after Lewis testified that he had no opinion as to the amount of the loss, and thus the full context of the deposition makes clear that Lewis was simply discussing the conclusions he drew from the limited data, not changing his earlier testimony and offering an opinion as to the amount of the loss.

Experts involved in the determination or calculation of a business income claim should be precise in their calculations and be able to support their conclusions with reliable and readily acceptable facts. An opinion without a factual basis is unreliable and inadmissible for trial purposes and worthless in the time of need. 

Vivian Persand has recently written two posts on this topic, What Role Does an Insurer's "Preferred Contractor Program" Play in a Bad Faith Lawsuit? and What Role Does an Insurer's "Preferred Contractor Program" Play in a Bad Faith Lawsuit? Part II. Slabbed recently noted evidence of the problem in Judge Senter Issues Three Orders in Rigsby Qui Tam Case. Slabbed linked a Memorandum Opinion which contained the following admissions by a State Farm expert engineering firm:

8. WHEREAS Forensic admits that it understood State Farm’s financial interests in having engineering reports submitted by Forensic that attributed the cause of storm damage to flood rather than storm winds;

9. WHEREAS Forensic admits that it believed State Farm would not continue employing Forensic unless Forensic agreed with State Farm’s assessment that the properties where secondary reports were requested were damage by water instead of wind and focused on any possible evidence of flood damage to support that finding;

10. WHEREAS Forensic admits that at State Farm’s request, Forensic sent a second professional engineer to re-evaluate 19 loss sites, and Forensic admits that it changed the conclusions in those 19 reports based on the second engineer’s inspection and after the initial reports were already sent to State Farm;

11. WHEREAS Forensic admits that it was asked not to perform a thorough structural evaluation or cost appraisal of the amount of damage identified at a given site, and Forensic agreed to follow State Farm’s instructions to describe only the predominant cause of damage to a home when attributing that damage to wind or flood;

12. WHEREAS Forensic admits that for certain properties it submitted subsequent reports that did not reference the existence of the initial report and that such a practice allowed State Farm to have the option of either removing and replacing the initial report in its file if it so chose[.]

With this type of claims gamesmanship, policyholders don't stand a chance of receiving the full benefit of the process. I noted that consumer protection laws are paramount to insurance profits derived wrongfully and unethically in Frank Artiles Responds to Post as Florida Insurance Politics Starts to Heat Up -- this is an example of how profits can be derived in a wrongful manner.

The problem is that this type of evidence is difficult to obtain. Nobody is going to advertise or publicly announce that they are coercing this type of behavior or doing it as a result of financial pressure. Nobody wants to admit to themselves that they are participating in an unethical game where they are trying to appear to provide full indemnity, but purposefully using methods to prevent it. Nobody wants to admit to being the "bad guy."

One simple step to help prevent these common activities would be to give policyholders a copy of the insurance company claims file and the entire file of the experts and vendors, including drafts. California currently allows policyholders to obtain the claims file by law before any litigation. Transparency is a wonderful tool if honesty is a significant value.

In Nicolau, a homeowner filed a lawsuit against its insurer for foundation and other structural damage that resulted from a plumbing leak that introduced water into the clay subsoil. The insurer retained an expert, HAAG Engineering¸ to conduct a study on the homeowner’s claim. It was established in Nicolau that the insurer hired HAAG Engineering with the belief that HAAG Engineering generally believed that leaks beneath a house would not cause foundation movement. As expected, the HAAG engineer concluded that there was no damage near the leak, but evidence showed that his investigation was not thorough because: (1) he did not isolate the leak; (2) he failed to determine the leak’s severity; and (3) he did not take any soil samples. The HAAG report concluded that the plumbing leak had not caused the damage, and the insurer denied the claim based on the HAAG report.

The Texas Supreme Court stated that an insurer’s reliance upon an expert’s report alone will not necessarily shield the insurer from liability if there is evidence that the report was not objectively prepared or the insurer’s reliance was unreasonable. Overturning an intermediate appellate court decision, the Texas Supreme Court found that there was evidence to support the jury’s finding that the insurer denied the claim in bad faith because there was evidence from which the jury could infer that HAAG’s reports were not objectively prepared, that the insurer was aware of HAAG’s lack of objectivity, and that the insurer’s reliance on the reports was merely pretextual.

Nicolau reaffirmed the long-established idea that insurance companies cannot expect their experts’ reports alone to shield them from bad faith liability.

Hangarter v. Provident Life and Accident Ins. Co. and Paul Revere Life Ins. Co., 373 F.3d 998 (9th Ct. App. 2004) is a first party bad faith case. Joan Hangarter, a chiropractor, operated her own business and had an “own occupation” disability insurance policy with Paul Revere Life Insurance Company (“Paul Revere”). She filed a total disability claim based on shoulder, elbow and wrist pain. Paul Revere paid benefits to Hangarter for eleven months and then terminated her benefits based upon the opinions of its medical examiners and claims investigators that Hangarter was not “totally disabled,” and she continued to work and earn an income, which made her ineligible for benefits. Hangarter sued for breach of contract, breach of covenant of good faith and fair dealing and intentional misrepresentation. The jury found in Hangarter’s favor, returning a verdict of over $7 million dollars, $5 million of which was for punitive damages. Though there were several issues analyzed by the Court, I will focus on how Paul Revere’s use of an IME was used against it as evidence of bad faith.

The facts in Hangarter demonstrated that after receiving the claim, Paul Revere retained Dr. Aubrey Swartz as an “independent medical examiner” (“IME”). In sharp contrast to the two physicians who had treated Hangarter, Dr. Swartz opined that Hangarter’s condition was “normal” and that she should be able to see two chiropractic patients an hour. The Court, however, determined that substantial evidence was presented at trial supporting the jury’s determination that the defendants conducted a biased investigation in connection with the retention of the IME. Dr. Frank Caliri testified as follows:

…Paul Revere’s letter terminating Hangarter’s benefits was misleading, deceptive, and fell below industry standards as it incorrectly advised Hangarter about her rights under the policy. The letter claimed that Hangarter was ‘working,’ and therefore was in violation of the policy. This statement, as Paul Revere acknowledged in the same letter, was false because Hangarter had already sold her chiropractic business.

There was also evidence that the defendants exhibited bias in selecting and retaining Dr. Swartz as the IME.

Paul Revere used Dr. Swartz nineteen times from 1995-2000. Caliri testified that when an insurer ‘use[s] the same [IME] on a continual basis,’ the medical examiner becomes ‘biased’ because they ‘lose their independence’. Similarly, evidence showed that in thirteen out of thirteen cases involving claims for total disability, Dr. Swartz rejected the insured’s claim that he or she was totally disabled.

It is important to note that Paul Revere’s letter retaining Dr. Swartz was written by an in-house medical consultant who had never examined Hangarter. In the letter, the in-house medical consultant claimed that there were no objective findings for a disabling injury. Caliri testified that this letter biased and predisposed Dr. Swartz against finding disabling injuries by telling him the insurer’s opinion.

How many of you think that carriers send letters like the one in Hangarter to their “independent” consultants? Do you think that carriers are in the habit of telling the consultants what the insurer’s position is and then ask, either directly or indirectly, whether there is any way that the consultant can support that position? Or do insurers hire “independent” consultants for their truly “independent” opinions? Food for thought, folks…this is another type of documentation that you need to make sure you get your hands on in a bad faith discovery case against a carrier. As if this wasn’t enough evidence of a biased investigation against the carrier in Hangarter, there’s more…

The court also considered evidence that the defendants developed and applied to Hangarter’s claim a comprehensive system for targeting and terminating expensive claims, such as those stemming from “own occupation” policies where the insured was a disabled professional who had been receiving benefits for months or even years. Sound familiar? Remember Quantum Leap? Remember incentive based bonuses for claims adjusters based on lowering claims across the board? I have written about a number of programs, policies and software over the course of the last few weeks, all of which are aimed at decreasing payments on claims without regard for the individual merits of each. In Hangarter, Dr. William Feist testified that the defendants, in the mid to late 1990s, instituted “unethical” policies such as round table claim reviews designed for the purpose of achieving a net termination ratio (the ratio of the value of terminated claims compared with new claims). There was additional testimony by Dr. Caliri that internal insurer documents revealed goals were set for terminating entire groups of claims without reference to the merits of each individual claim. For those of you that have been following this blog the last few weeks, this should ring some bells - does this sound similar to the severity discussed in Don't Forget to Consider the Severity of Your Claim? How many of you are thinking about leakage or combined loss ratio?

The Court determined that the evidence presented against the defendants was certainly enough to support a finding that the defendants engaged in a biased and, therefore, “bad faith” investigation. As such, that part of the lower court’s ruling was upheld.

As mentioned last week, the foregoing analysis should not be limited to just medical providers. This analysis can apply to engineers, appraisers, roofers and other types of consultants retained by insurers to assist them with the investigation and evaluation of claims. Consider how arguments like those in Hangarter and in Ritchie v. Krasner, M.D., et al., 211 P.3d 1272 (Ariz. Ct. App. 2009), can be applied in your cases.

Happy Thursday!

In Ritchie v. Krasner, M.D., et al., 211 P.3d 1272 (Ariz. Ct. App. 2009), the Plaintiff, Jeremy Ritchie, injured his back at work. He suffered from a bruised spinal cord that caused swelling and compression of the cervical spinal cord. The chiropractors at the emergency clinic suggested that Ritchie contact Paula Insurance (“Paula”), Ritchie’s workers’ compensation carrier. Ritchie did so and Paula retained Dr. Krasner to conduct an IME. Before the examination, Dr. Krasner had Ritchie sign a document including the following statement:

It is very important that you realize that no Doctor/Patient relationship exists between you and Dr. Krasner…This is done to insure that all findings will be neutral, and that the evaluators are completely independent and not involved in your disability claim or source.

After the examination, Dr. Krasner reported to Paula that Ritchie’s injury was stationary, that there was no indication for supportive care and that there was no need for any work restrictions. Paula relied upon Dr. Krasner’s evaluation and terminated Ritchie’s benefits. In an affidavit, Ritchie testified that he was advised that his condition was stable, that he did not need further medical treatment and that he could go back to work without restrictions. Ritchie relied upon those representations and went back to work. He did not seek treatment for several months.

Ritchie’s condition, however, progressively deteriorated and he saw Dr. Solomon, a neurologist. Dr. Solomon diagnosed Ritchie with a cervical spinal cord compression and ordered immediate spinal cord surgery. The surgery halted further deterioration of Ritchie’s spinal cord, but, by then, further damage already occurred. Part of Ritchie’s spinal cord had died during the eight months before the surgery, during which the undiagnosed spinal cord compression progressed. After the surgery, Ritchie developed central pain syndrome, which caused constant pain and discomfort. Dr. Solomon prescribed the narcotics Oxycontin and Oxycodone, as well as sleep medication and something to reduce muscle spasms. Ritchie died of an accidental overdose.

Before his death, Ritchie had filed a medical malpractice lawsuit against several of the treating chiropractors, including Dr. Krasner. After his death, Ritchie’s parents and son amended the complaint to include a claim for wrongful death.

The Court began its analysis with an evaluation of an IME Doctor’s Duty:

Even absent a formal doctor-patient relationship, a doctor conducting an Independent Medical Examination (‘IME’) owes a duty of reasonable care to his or her patient….It can arise from a relationship between the parties, a contractual relationship, or any number of other types of contracts…A special or direct relationship, however, is not essential in order for there to be a duty of care.

It then discussed the factors established in Stanley v. McCarver, 92 P.3d 849 (Ariz. 2004), to determine determining the existence of a duty:

[W]hether the doctor was in a unique position to prevent harm, the burden of preventing harm, whether the plaintiff relied upon the doctor’s diagnosis or interpretation, the closeness of the connection between the defendant’s conduct and the injury suffered, the degree of certainty that the plaintiff has suffered or will suffer harm, the skill or special reputation of the actors, and public policy…When a patient places oneself in the hands of a medical professional, even at the request of one’s employer or insurer, one may have a reasonable expectation that the expert will warn of any incidental dangers of which he is cognizant due to his peculiar knowledge of his specialization’.

When applying the foregoing principles to the facts of the Ritchie case, the Court noted that Paula hired and paid Dr. Krasner for the following reasons: (1) to conduct an IME in order to determine whether Ritchie was injured on the job; (2) to assess his current condition; (3) to evaluate treatment options; and (3) to assist in determining whether Ritchie was entitled to compensation and treatment. The Court agreed with Dr. Krasner that he did not have a duty to perform a thorough enough examination to discover every condition that could be harmful to Ritchie when the condition that posed a risk to Ritchie’s health was not discovered during the IME. However, ethical standards govern physicians and other medical providers. As such, when Dr. Krasner agreed to conduct the IME, he still assumed a duty to conform to the legal standard of reasonable conduct in light of the apparent risk. It is important to consider that Ritchie testified during his deposition that he relied upon Dr. Krasner’s finding and, based on that reliance, he did not seek additional medical care until several months later when he continued to suffer.

…[W]e can envision no public benefit in encouraging a doctor who has specific individualized knowledge of an examinee’s serious abnormalities to not disclose such information...and to not investigate the symptoms of a cervical spine injury.

As such, the Court explained that the notice Ritchie signed with regard to the lack of a doctor/patient relationship with Dr. Krasner did not absolve Dr. Krasner of his duty of care. When applying the foregoing principles to the facts of the case along with analyses of a few other issues presented, the court found Dr. Krasner and a few others liable for medical malpractice and for the wrongful death of Ritchie.

Though Ritchie addresses a case where a medical provider’s duty to the insured’s was evaluated, it is important to consider that a similar analysis can be applied in the arena of property insurance. Insurers hire engineers, appraisers, accountants and experts/consultants who specialize in various other fields to assist the carrier with the investigation of property damage claims. These individuals or entities are asked to render an opinion or provide an evaluation of the damages at issue. Typically, the carrier relies upon those determinations, reports or results when making a coverage decision and/or deciding how much to pay on a claim. Those consultants/experts are usually governed by the ethical and/or regulatory standards that apply to their profession. As a result, it is likely that consultants, other than just those in the medical field, also have a duty to an insured and can be subject to similar scrutiny.

Thank you for checking out our Property Insurance Blog this week and I hope you check back next week.

Happy Friday!

Generally, under Rule 702 of the Federal Rules of Evidence, specific and relevant knowledge, skill, experience, training, or education is required to qualify an expert witness. There are no degree or certification requirements, and no years of service or publication requirements. Courts have allowed experts with no formal education but years of experience (See Eagle Pet Serv. Co. v. Pacific Employers Ins. Co., 175 A.D. 2d 471, 572 N.Y.S. 2d 625 (N.Y.A.D. 3 Dept., 1991)) and “academics with no practical experience” (See Lavespere v. Niagara Mach. & Tool Works, 910 F.2d 167 (5th Cir. 1990)). Sometimes the qualifications of an expert will be called into question, and other times the dispute will be over the reliability of the expert’s principles and methods.

The same issue of hurricane damage versus wear and tear that I was litigating in South Florida also came up recently in North Carolina federal court over distinguishing between a covered cause of loss (Tropical Storm Ernesto in 2006) and an excluded cause of loss (wear and tear). In Sheffield v. West American Ins. Co., No. 08-191, 2010 WL 2990012 (E.D. N.C. July 27, 2010), the insurance company argued that the insured’s experts’ opinions should be excluded because they were “unreliable and wholly speculative, because, among other things: (1) their opinions are based on speculative and unsupported assumptions, not facts, data or scientific knowledge; and (2) their opinions are not based on reliable principles or scientific methods.”

The Sheffield Court turned to the United States Supreme Court decisions in Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579 (1993) and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999) to determine if the experts’ testimony would be reliable:

The Supreme Court has noted four non-exhaustive factors a court may use to determine the reliability of scientific expert testimony: (1) whether a theory has been tested; (2) whether it has been subject to peer review; (3) whether a technique has a potential rate of error or standard operating procedures; and (4) whether a theory is generally accepted within the scientific community. Id. These four factors do not need to be applied in all cases; the trial judge has “considerable leeway” in an individual case to determine “whether particular expert testimony is reliable.” Kumho Tire Co., 526 U.S. at 152 (1999).

The  Sheffield opinion did not discuss the principles and methods the experts were using, but rather found that the insurance company did not meet its burden of proving that the experts’ testimony would be totally speculative or wholly irrelevant.

Courts are not limited to the factors above to determine admissibility of expert testimony. The advisory committee note to Rule 702 of the Federal Rules of Evidence includes additional factors, and other courts have modified or changed the list above. If you are considered an expert in something, let me know what makes you an expert and why. If you have ever looked for an expert, let me know what qualifications you look for. For everyone else reading this, enjoy a little expert testimony from Hollywood:
 

A recent case, Penford Corp. v. Nat'l Union Fire Ins. Co., 2010 U.S. Dist. LEXIS 60083 (N.D. Iowa June 17, 2010), demonstrates this frequent challenge regarding claims practice experts on various issues of testimony. Indeed, the policyholder and insurer challenged the ability of each others claim practice expert to testify.

Regarding the policyholder's expert, the Court found the following:

The court finds that its previous rulings do not preclude Jolstad's testimony on the issue of bad faith. Penford contends not only that Defendants acted in bad faith with regard to coverage, but also with respect to the timing of Defendants' payments on amounts undisputedly due under the policy. In its previous ruling, the court held that the policy language was ambiguous. Defendants argue that this ruling somehow moots Penford's bad faith claim, because Defendants' refusal to pay in light of the ambiguous policy could not be in bad faith. The court disagrees. "'To establish a first-party bad-faith claim, a plaintiff must show the absence of a reasonable basis for denying benefits of the policy and defendant's knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.'" Vos v. Farm Bureau Life Ins. Co., 667 N.W.2d 36, 51 (Iowa 2003)...Defendants have not cited any authority suggesting that the existence of ambiguous policy language is a reasonable basis to deny a claim and precludes Penford from asserting a bad faith claim.

...Penford also alleges that Defendants acted with bad faith in delaying payment of certain sums that Penford was undisputedly entitled to under the policy. Thus, Jolstad's opinions are probative on the issue of whether Defendants acted in bad faith in handling Penford's claims. See Fed. R. Evid. 401 ("'Relevant evidence' means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probable than it would be without the evidence."). Accordingly, the court finds that its previous rulings do not bar Jolstad's opinion testimony on the issue of bad faith.

Defendants also ask the court to bar Jolstad's opinions regarding the timeliness of Defendants' payments to Penford. First, Defendants claim that Jolstad's opinion on this issue is based on nothing more than his "fertile imagination" and has "no basis in either the policy or the Iowa statutes." ... Second, Defendants argue that his opinions on this issue are irrelevant because Penford cannot quantify any damages as a result of any delay in payment.

The court disagrees with Defendants claim that Jolstad's opinion must be barred because it allegedly has no basis in the policy or Iowa statutes... Under Iowa law, a plaintiff may prevail on a bad faith claim if he or she can show that "the insurer 'lacked a reasonable basis for denying or delaying payment of the claim.'" ...Jolstad's opinions are based on his extensive experience in the insurance industry, and his testimony as to whether Defendants conduct constituted bad faith--when judged against the customs, practices and standards of the insurance industry--will be helpful to the jury in assessing Penford's bad faith claim. Defendants can appropriately test Jolstad's opinions, and the basis for them, on cross-examination and through the presentation of contrary evidence, including their own bad faith expert, Peter Evans. (emphasis added)

I almost started laughing at the first part of the reasoning. An insurer acting in "good faith" is supposed to construe ambiguous language in favor of the policyholder and thus pay. Only if coverage is unambiguously excluded or not owed does an insurer escape that responsibility. This is what is taught to adjusters in basic claims school, although the insurance attorneys then try every means possible to prevent juries from learning of this duty.

Obviously, the second highlight was a preview of the Court’s ultimate holding on the admissibility of the expert testimony:

Penford argues that Evans' bad faith opinions are unverifiable because they are not based on anything other than Evans' "word" and are therefore inadmissible...The court disagrees. As with Penford's expert, Jolstad, Evans' opinions regarding Defendants' alleged bad faith are based on his extensive experience in the insurance industry, particularly as a loss adjuster. The court finds Evans to be sufficiently qualified as an expert on the handling of insurance claims based on his knowledge, skill and experience ... The court also declines to exclude Evans' opinions based on Penford's contention that they cannot be measured against any "authoritative body of governing principles." Penford's arguments are appropriate subjects for cross-examination or the presentation of contrary evidence, such as opinion testimony from its own bad faith expert...

Penford also asks the court to bar Evans' bad faith testimony because he purportedly failed to apply the appropriate standard for bad faith under Iowa law. As previously stated, a plaintiff may prevail on a bad faith claim if he or she can show that "the insurer 'lacked a reasonable basis for denying or delaying payment of the claim.'"... Evans testified that the claims handling process should be judged by "objective standards of reasonableness."... He later described the standard as "promptness and reasonableness." ... Evans' report includes his opinion that Defendants did not "unreasonably" delay payments...The court finds that Evans' opinion is sufficiently based upon the correct ... standard for bad faith claims under Iowa law. Accordingly, Penford's Motion is DENIED to the extent it seeks to bar Evans' testimony regarding Penford's bad faith claim.

Experts can help in discovery and at trial of bad faith cases. However, there is no certainty that a Court will allow all the evidence or opinions about insurance conduct to be explained by an expert at trial because those challenges are now the rule, rather than the exception. Accordingly, the lessons are:

1. Retain experts who have experience in the industry,
2. Retain experts who can help with discovery matters,
3. Retain experts who have the time to write thorough and documented reports based on the legal claims conduct standards and burdens.

All this discussion of "bad" brings to mind a classic as the weekend nears: 

I am thrilled as well. Our firm spent over sixty thousand dollars in costs for experts, deposition costs of USAA’s experts, deposition transcripts, and trial exhibits. All of it plus our time was on the line pending the outcome of the trial. Without spending the money to properly prepare and present the case, we certainly would have lost. I am fairly certain that USAA spent a considerable sum above that for its able attorneys and their costs. Its pockets are a lot deeper than ours because it can use its own customers’ premiums to finance litigation against them.

Craig Kubiak has tried approximately ninety cases to a jury verdict. I asked him what he felt was a significant deciding factor in the case. He claimed it was the credibility of the insurance company experts at trial. Sinkholes involve very complex geological concepts. Unfortunately in Florida, they are not rare. However, the distress sinkholes place on structures mimics a number of other geologic and subsurface activities which manifest in cracks or downward subsidence. Without precise and thorough investigation, much sinkhole damage to structures can improperly be attributed to a number of causes excluded under most property insurance policies. Indeed, except for Florida statutes mandating the sinkhole coverage, insurance policies generally exclude this cause of loss.

Craig felt that the pre-trial depositions taken by his wife Kelly lead to a number of flaws and admissions by the insurance company experts. Apparently, some of the soil borings taken by USAA sinkhole experts were discarded before we could have our experts review them. We felt this was improper and tried to exclude the experts’ opinions, but the trial court did not rule with us on the spoliation of evidence issue. We were surprised by this trial ruling. Indeed, the destruction of evidence certainly prevented us from fully questioning the basis for their findings. In the future and as a result of this case, it is my understanding that USAA will require its experts to retain the physical evidence gathered to support their experts’ opinions.

Craig also said the opposing counsel was one of the finest and most effective trial attorneys he has faced. Most insurance counsel are pretty good at trial or they would not be hired by insurance companies on a repetitive basis. Craig and I discussed how it must feel to represent insurance companies on such a basis and if there is joy in a sense of winning for an insurance company. The biggest litigation machines in America are insurance companies and they are savvy at legal representation. We are aware of a number of insurance defense counsel who pour their hearts out, win at trial, and then get rewarded with a fight about the amount of the legal bill or having other less skilled competitors ready to take over an account for cheaper fees.

Under Florida law, we are now allowed to request interest on the amount owed since the time of the denial. We will also ask for taxable costs and an award of reasonable attorneys fees. Had we not prevailed, USAA had filed an Offer of Judgment against its policyholder which it threatened to enforce. Such an action by USAA would have effectively bankrupted its customer merely for filing an insurance claim with USAA and challenging USAA in court. I mention this because, while many USAA customers think USAA is such a nice and good company typically catering to the military, it has a litigation history which can only be described as quite harsh with their member policyholders. The Mississippi Katrina litigation is such an example where USAA has tried nearly as many cases as State Farm, despite having a much smaller market share. Slabbed reported on one such a case in Judge Bridges: the negligence was not “gross.” Still, there are many insurers with a much more “difficult” claims culture than USAA and I feel the Katrina litigation was an aberration for the typical claims decision making for USAA.

Trials are important for society. Lessons are learned from them. Future litigation and controversies can be avoided from the lessons, if applied. I am certain that our mid-fifty year old single mother of two is relieved that she is not facing bankruptcy. Whatever USAA pays in judgment of the verdict and ancillary amounts owed has no such impact upon it. USAA executives and claims managers probably are not worried about any accountability for their wrong decision. I doubt they regret anything.

Indeed, this issue does not get raised just by insurance adjusters. My experience is that when insurance defense counsel hire engineers, the engineering report repeatedly notes the lack of “structural” damage to a building. A noted example of this is with roof claims. HAAG engineers often repeat in their reports and at seminars that there is no structural or functional damage to shingles or parts of the roof. The result is insurance company attorneys saying that they are not paying for anything unless there is proof of “structural damage.”

I am going to provide just one example to show how absurd this position is. The FC&S Bulletins discuss the issue and use the same example of vandalism that I usually provide. Interestingly, the question posed involved a roof with cosmetic damage, and I bet the insurance company had a roofing expert say there was no functional or structural damage to the roof:

Direct Physical Loss and Cosmetic Loss

Hail stones have created dents to a copper roof. The section of roofing is located over a second story bay window. It does not appear that the hail has compromised the life span of the roof's surface or otherwise affected or decreased its useful lifespan.

Our HO policy provides coverage for direct physical loss. If the roof's integrity was not compromised by the hail stone impact, has a physical loss occurred?

We believe that some carriers view this type of damage as cosmetic and do not provide coverage for replacement of the copper roof. Does FC & S have an opinion?

ANSWER

Whether or not the dents are cosmetic or affect the roof structure, they are still direct physical loss. The policy doesn’t define damage so standard practice is to go to a desk reference. Merriam Webster Online defines damage as loss or harm resulting from injury to property, person, or reputation. The roof now has dents where it didn't before; that's direct damage. The policy doesn't exclude cosmetic damage, so direct damage, even if it is cosmetic, is covered. It's the same as if vandals had painted the side of the house purple. While cosmetic, it's damage, and is covered. The principle of indemnity is to restore the insured to what they had before the loss, and this insured had a roof with no dents.

I am raising this issue in part because there are so many Hurricane Ike disputes where the insurers are not paying for roof damage. One of the arguments is that they do not pay for “cosmetic damage” which is wrong. The vandalism example made by the editors of the FC&S Bulletin clearly shows that the property policy covers for damages to the appearance of structure or property so long as it is by a covered peril.

Could you imagine what would happen if a wife asked her husband, "Honey, where were you," and one of two answers were given:

1. "I am not going to tell you where I was because there is no law or regulation that says I have to tell you."
2. "I stopped by the Alibi Lounge to have a drink with the guys." Which may have been true, but only after also seeing "my girlfriend" for an hour outside the lounge.

You can imagine the response. Do insurance company managers understand how their policyholder customers feel with an analogous answer? Yet, it is commonplace.

Even when corporate and commercial policyholders ask if the property insurance adjuster or the insurance counsel can provide drafts of reports or whether they are editing drafts of an alleged expert engineer, the questions are unanswered. Many insurers refuse to answer claiming such information is "work product." Many send the "last" draft which is allegedly the most accurate. It is amazing how often the last draft lowers claims payments.

There are claims managers that mandate full transparency of issues and questions. One State Farm senior claims manager even said that his company has an obligation to provide all drafts to policyholders. This type of transparency in the claims process should be applauded, even if it eventually ends up in a dispute. Honest and good faith differences of opinion can occur. Why not be honest about those?

Even in Great Britain, I notice that policyholders perceive that the claims process is "gamed" against policyholders. While trying to put myself to sleep last night, I read a book from the Oxford University Press, "Policies and Perceptions of Insurance Law in the Twenty-First Century," M. Clarke (Oxford Univ. Press 2007), that verified people in England have the same perceptions regarding an insurer's honest reasons for claims decisions:

"First, it has been doubted whether adjusters come to claims with an open mind. Secondly, why, when the adjuster's investigation is complete, is the report drawn up by the 'independent' adjuster available to the insurer but not to the claimant? The answer is that, in reality and in law, adjusters are the agents of the insurer. The perception of many claimants, who view adjusters with resentment and distrust, is that adjusters are brought in only to beat the claim down."

I can imagine that Slabbed and my policyholder friends in Texas, Mississippi, and Florida can take some refuge in the fact that other legal systems, even one much older than ours, are battling the same problems.

Most policyholders do not know where to find experts familiar with issues of windstorm damage. Many cannot afford to do so. Today, I am making available a client’s meteorologist report to help demonstrate that many areas in Galveston, Bolivar and Houston sustained tornado type wind events.

The report notes that there were sufficient wind speeds to cause extensive damage by tornadic events along the Bolivar peninsula and other areas:

"Using the collected NEXRAD data and knowing the limitations of NEXRAD to detect these phenomena, I estimate that there were over 60 mesocyclones that moved over the Bolivar peninsula. Based on this estimate and using the percentages from previous studies, this would place between 18 to 30 tornadoes on Bolivar peninsula as early as 10:43PM, September 2008.

There are several pictures I took during the site visit that show distinct rotation based upon how remaining structures and poles were oriented. This indicates tornadic activity.

At 7:00PM, September 12, 2008 there were measured winds of 115 knots (126 miles per hour) only 2000 feet above the surface along the edge of the Bolivar peninsula. This measurement was recorded by a rawinsonde observation. With the numerous convective cells over the Bolivar peninsula, it is very plausible that winds from 2000 feet above the surface were transported down to the surface causing gusts as high as 100 miles per hour. These winds would not be detected by NEXRAD because the radar beam would be located above the 2000 foot level over Bolivar peninsula." 

Anybody can use this report for any purpose they wish. The bottom line is that the insurance company experts typically do not conduct this kind of in depth investigation to find evidence supporting higher payments. Get your own analysis if you suspect your insurer is underpaying your claim. 

Remember, every jurisdiction is different. Case law and regulations need to be checked. Read the policy to see if it has restrictions on matching because we are seeing more policies that exclude payment for costs associated with matching damaged portions of real or personal property. Coverage may be provided for "pairs" or "sets." Again, the policy is the first place to start any analysis of coverage.


The Suggestion:

Get as much proof from experts indicating that to fix the "damaged" property and not be worse off than before, you have to match the property. And, you must show that it is impossible to somehow "patch" the damaged area so it will match. Get experts to back you on the claim and many insurance adjusters will pay.



Two Good Case Examples

In Holloway v. Liberty Mut. Fire Ins. Co., 290 So. 2d 791, 793-794 (La.App. 1 Cir. 1974), the discussion helps show what type of proof is needed: 

Kenneth McKay, plaintiffs' interior decorator, was qualified as an expert in the field of interior design. He testified that, since the color and pattern of the carpeting originally used in plaintiffs' house had been discontinued, it was impossible to replace the damaged carpeting without replacing all of the carpeting in the bedroom wing of the house. Even if the same color and texture of carpeting could be obtained, to replace only the damaged portions of the carpet, would result in unsightly seams at the juncture point, according to Mr. McKay, and contrast between the old and the new carpeting would be readily apparent and would have an adverse effect on the overall market value of the house. Mr. McKay likened the replacement of the damaged carpet to the effect of replacing a sleeve in a suit with other than the same material with which the whole suit had been tailored originally. He also testified that it was the general practice in Baton Rouge in houses of the type of plaintiffs to use one kind of carpeting and one color in all of the bedrooms, and that to do otherwise would depreciate the value of the house. Mr. McKay testified further that he had been consulted by 50 - 100 homeowners in Baton Rouge who had sustained water damage to their carpeting, and that he always recommended replacement of the carpet in the entire bedroom wing, if the damage had been in any part of that area.

W. W. Wilkinson, a qualified realtor, also testified that if carpeting of the same texture and color is not used in the entire bedroom wing of houses such as the Holloways' house, it diminishes the value of the house by $1,000 to $2,000.

In the light of the testimony of the expert witnesses in this case we find no error in the judgment of the trial judge in awarding plaintiffs the cost of the replacement of the carpeting in the entire bedroom wing of their house." (emphasis added)

An Ohio case stands for the proposition that an insurer must not only match, but pay for undamaged covered property if it is necessarily damaged as a result of fixing the damage initially caused by an insured peril. In Mastin v. Sandy & Beaver Ins. Co., 10 Ohio Misc. 2d 22, 23 (Ohio County Ct. 1983) the court noted and found:

The floor was damaged when a hole was cut in it to gain access to the plumbing system in the house. Evidently, there is no basement or crawl space otherwise accessible. It was uncontroverted that plaintiff's home was in fact damaged by the storm and that it was truly necessary to go through the kitchen floor to repair the damage. Defendants, however, wish only to pay for the floor to be patched, and not replaced. The floor is of vinyl covering such as is purchased in a roll. It is not tile.

Plaintiff's insurance agreement states defendant company is obliged to repair or replace damaged property. The court finds that vinyl flooring cannot be said to be repaired if an obvious patch is left, and that the whole floor ought to have been replaced.

One Case to Learn From

A case which could be read for an insured being "unreasonable" without sufficient proof is St. Paul Fire & Marine Ins. Co. v. Darlak Motor Inns, Inc., 3:97-CV-1559-TIV, 1999 U.S. Dist. LEXIS 23283 (M.D. Pa. Mar. 9, 1999). The assertion by the policyholder was set out by the Court:

Darlak asserts that St. Paul must pay for redecorating the non-damaged rooms because it was necessary to replace the wallpaper and carpet in all of the rooms in order to maintain the continuous decor of the third floor of the hotel... "The rooms that did not suffer physical damage as a result of the fire are also considered damaged property under the policy since the undamaged rooms must look the same as the rest of the rooms on the floor." ...Darlak further contends that "failing to match constitutes successive damage and fails to place the insured in a pre-loss condition."

This situation is quite common in hotels and motels where there are requirements that the rooms have to match. In those situations, it is important to get the franchise inspector to testify about why this is an important aspect of hotel and motel management and leads to a devalued property. Many commercial insurers will pay for this. Obviously, St. Paul does not pay for matching.

The finding was based on a lack of evidence and better proof offered by St. Paul:

Here, Darlak has not provided any proof of loss to the undamaged rooms n7 other than the general assertion that it "would be in worse position subsequent to the loss if the premises looked different in one place than in the other." However, Darlak offers no evidence that it cannot match the damaged rooms to that of the undamaged rooms. Darlak's contention that a failure to redecorate the entire third floor would amount to the creation of an 'eyesore" ignores common sense. Logic dictates that the damaged rooms can be decorated to match the undamaged rooms.

n7 St. Paul persuasively notes that because of sophisticated paint matching' techniques and the widespread availability of carpeting, wallpaper and drapes, Darlak should be able to match the decor of the damaged and undamaged rooms.

We are currently representing a number of hotels and motels with similar issues. You can bet we will provide proof to back up our clients' claims, and I suggest you do the same. Sometimes, there are matching techniques which make the issue moot. However, some insurers will not pay the additional costs of those repair techniques since they claim they do not pay for matching or the "additional" cost of matching.

And, some wonder why we have to file lawsuits over insurance claims.

One of the central figures in many of the State Farm cases is Lecky King, a State Farm adjuster. For a period of time, she invoked her Fifth Amendment privilege and said nothing at depositions relating to her role in adjustments. There were criminal investigations underway after dozens of altered engineering reports surfaced; each initial report was changed to reflect greater flood damage and less damage that would be covered under State Farm policies. Lecky King was allegedly at the center of this controversy, in part, because she reviewed a stack of engineering reports that were subsequently modified.

State Farm did not voluntarily reveal the original engineering reports showing greater wind related damage to its policyholders or the federal government. A State Farm claims executive has rightly indicated that those reports should have been disclosed to the policyholders, along with the "modifications." While Slabbed has a tendency to poke and demonize insurers, there are many in the claims function that understand honesty and good faith mean a complete explanation of the truth, not just a disclosure of information supporting denial or less payment.

In a recent post, Slabbed noted an email from the Rigsby’s counsel that the deposition of Lecky King had been taken. It should be interesting, and we will attempt to get a copy of it. This is a coverage related case worth following because it provides some glimpse at the pressures that claims supervisors demonstrate when faced with a claims organization that never wants to "overpay" a claim. If you never "overpay," there is only one way to go.

From large corporate policyholders to young newlyweds in modest residential structures, here is the truth about how most insurance company experts are hired:

Most insurance experts, regarding cause and amount of loss, are in the business of providing repeat opinions for insurance companies. If they give opinions which lead to a larger recovery than acceptable or appear to find ways to maximize the recovery for the policyholder, they are not hired again. Because insurance companies offer significant repeat and continuous business, many experts in the insurance business depend on insurance companies for their livelihood. The opinions of most insurance industry experts reflect the language of the policy to help the insurance company reduce the amount owed on claims. This is a major problem in the insurance adjustment culture, and most claims departments avoid the obvious implication.

Every now and then, an expert will jump sides and provide an honest and accurate opinion. I have retained a few with the understanding they could only do it quietly or on a very limited basis. This takes significant courage because the financial consequences are great--if found out by the wrong person, most would find they have been removed from the "approved" lists found in the claims offices.

A fairly recent Texas appellate decision, State Farm Lloyds v. Hamilton, 265 S.W.3d 725 (Tex. App. Dallas 2008), demonstrates how the Courts should treat this all too common situation. The policyholder's masterful appellate brief started off with the most damning evidence in the case:

"In October of 2003, Mark Ogle, a twelve-year veteran with State Farm, stood in the middle of the Hamiltons' living room and personally viewed a two foot hole in their living room floor full of water from a corroded, deteriorating cast-iron metal pipe at the bottom. He personally observed the defects with the house and immediately hired George Perdue & Associates, the engineering firm that State Farm had hired 1,440 times in the last four years and paid over $ 3.3 Million in that time period."

Appellees’ Brief at 1, Hamilton (No. 05-06-01032-CV).

It does not take a rocket scientist to correctly guess who won the appeal. The policyholder, if he knew of the relationship the engineering firm had with State Farm, would probably feel a lot like an American on trial in Iran. The point is that insurance adjusters and their managers know their customers deserve honest and good faith treatment. Just like in Iran, the system breaks down when outcome oriented conclusions are inevitably reached.

The Texas appellate Court made the following observation of law:

"an insurer breaches its duty of good faith and fair dealing when the insurer fails to settle a claim if the insurer knew or should have known that it was reasonably clear that the claim was covered...[A]n insurer's reliance on an expert report, standing alone, will not necessarily shield the carrier if there is evidence that the report was not objectively prepared or the insurer's reliance on the report was unreasonable... Whether an insurer acted in bad faith because it denied or delayed payment of a claim after its liability became reasonably clear is a question for the fact-finder."

State Farm Lloyds v. Hamilton, 265 S.W.3d 725, 734 (Tex. App. Dallas 2008).

The Court then noted the facts presented to the jury to uphold the bad faith verdict:

"Evidence of an investigator's biased views, standing alone, will not always be evidence of bad faith...But the Hamiltons deny that their bad-faith claims are limited to the biased-investigator point. In their briefing, the Hamiltons make eight more specific charges that allegedly support their claim of bad faith:

*

Perdue and State Farm did not rule out other possibilities.

*

Perdue and State Farm stated the east side of the home was wet, but their soil sample showed it was dry.

*

Perdue and State Farm had no soil samples on the west side of the house to support their contention that the west side of the house was dry.

*

Perdue and State Farm say flow tests support their contention that the plumbing leak did not cause the problem, but there was no flow test on the living room leak.

*

Perdue and State Farm's conclusion of no liability is not supported by facts.

*

Perdue and State Farm's conclusion that the house being four inches out of level is acceptable.

*

Perdue and State Farm fail to identify stress signs.

*

The face of the report had problems with the honesty of the report."

Hamilton, 265 S.W.3d at 735.

These issues were prevalent in Hurricane Katrina litigation. There, many expert reports originally favoring coverage were changed to findings limiting or denying the claim. This issue will undoubtedly be raised during Hurricane Ike litigation; this problem is rampant throughout the property adjustment community. So long as the insurance adjustment community is looking for “conservative” (which is different from the social or political context) experts to provide “favorable” (which means paying less or not at all) conclusions, policyholders should know to get their own experts and consultants.