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

Simply stated, there is enough authority to discourage this type of claims adjusting practice. Even the authors of the National Underwriter’s FC&S Bulletin, which is a source of information the insurance industry usually relies on to update their business practices, discourages this type of claims adjusting in business income claims. The following are two examples found in their Q&A section which should assist the policyholder professional in dealing with this type of coverage situation.

Concurrent Causation Language Does Not Exclude Windstorm Loss

My client, a tenant with a business owners policy, suffered a business income loss resulting from Hurricane Ivan. During the storm, the building had off-premises loss of power and wind damage to the roof. We were unable to determine which occurred first.

The adjuster cites the following exclusion as applying to the loss: "We will not pay for loss or damage caused directly or indirectly by any of the following...off-premises power failure." The adjuster cannot be the judge to determine which came first, power failure or roof damage.
I feel that the insured, due to water damage from the roof, incurred loss of business income. His employees could not occupy the building due to water damage and power failure. The adjuster cannot determine when the power would have been turned back on—possibly the power could have been restored after the storm, so I do not believe that she can apply the off-premises power failure exclusion.

The adjuster told me that even if the building had been destroyed by the hurricane, due to off-premises power failure, the exclusion would still stand because of the "concurrently or in any sequence to the loss" language in the policy. Based on her statement, even if power can be restored within a few days, the subsequent business income loss would not be covered.
I am confused by the concurrent language that the insurer is using to justify denying the claim.

Alabama Subscriber

A.

The business income loss resulting from a suspension of operations from windstorm damage to the roof should be paid under the businessowners policy. Any suspension of operations and resulting business income loss that occurs solely because of off-premises power failure is excluded.

It does not matter whether the off-premises power failure or the windstorm came first. The concurrent causation language excludes coverage only for the loss that results from power failure and does not affect other damage that might result from a covered cause of loss. It does not say that damage from windstorm (a covered cause of loss) is not covered if an excluded cause of loss (the off-premises power failure) also occurs.

It may help to insert the words "off-premises power failure" into the concurrent causation introductory language as follows:

We will not pay for loss or damage caused directly or indirectly by off premises power failure. Such loss or damage (from off-premises power failure) is excluded regardless of any other cause or event (such as windstorm) that contributes concurrently or in sequence to the loss (from the power failure).

Hurricane Damage and Business Income Loss

Our insured is a seafood restaurant and wholesaler located in Florida. The owner was ordered to evacuate because of Hurricane Frances . When he returned, he found there was direct wind damage to the condensing unit of the large walk-in cooler. Also, a light pole that was on an easement on the neighboring premises collapsed onto the insured's building's roof, causing damage.

As a result, all the seafood spoiled and the insured sustained a loss of business income. The adjuster told our insured that there was no coverage because of the exclusion for power failure. However, the adjuster also said that he could not establish if the power went out before the actual wind damage to the condensing unit.

Because of the evacuation, the insured was not on the site at the time, so he couldn't provide definite evidence one way or another. But since it is at least possible that the wind was the direct cause of the condenser's failure, we think the insured should get the benefit of the doubt. We should add that the form is not a standard ISO form.

What do you think? Is the insured entitled to business income loss because of the property damage and the spoilage?

Florida Subscriber

A.

There are points in the coverage form you sent that support the insured's view. First, there is an endorsement attached that provides coverage for loss or damage directly caused by wind. So, if the wind directly damaged the condenser unit, perhaps by blowing an object against it, that would certainly be covered property damage. The light pole's collapsing onto the roof, damaging it, is also covered property damage. So, unless some other exclusion eliminates coverage, this covered property damage triggers business income coverage.

The next point to consider is the food spoilage. Here, it appears the adjuster has focused on the exclusion for failure of power or other utility service "however caused and wherever such failure should occur." But it is possible that the power never failed at all—the condenser quit working because it was damaged by the wind.

The policy you sent contains an exclusion for "dampness of atmosphere, dryness of atmosphere, changes in or extremes of temperature... change in flavor or color or texture or finish… All whether loss or damage from such excluded Causes of Loss is direct or indirect, proximate or remote, or be in whole or in part caused by, contributed to, or aggravated by a Cause of Loss covered under this Policy."

This exclusion, however, has been deleted in its entirety by endorsement. Given the insured's business, this is the type of endorsement we would expect to find; other forms add coverage for spoilage by endorsement, but this insurer provides coverage through deleting the exclusion.
So, the final point to be made: excluding loss resulting from power failure "however caused" and then giving back coverage for spoilage would render coverage illusory. This is the major reason refrigerated products spoil. The insurer could always invoke the exclusion in any situation, leaving the insured to wonder what he'd been paying for.

But, as we noted, the power might not have failed at all; the condenser might have quit working because of wind damage, leading to the covered spoilage.

ISO’s CP 00 30 06 95 and CP 00 30 10 00 (Business Income and Extra Expense Forms) state in relevant part:

3. Period of Restoration means the period of time that:

a. Begins:

(1) 72 hours after the time of direct physical loss or damage for Business Income coverage; or

(2) Immediately after the time of direct physical loss or damage for Extra Expense coverage;
Caused by or resulting from any covered cause of loss at the described premises; and

b. Ends on the earlier of:

(1) The date when the property at the described premises should be repaired, rebuilt or replaced with reasonable speed and quality.

The FC&S Bulletin offers an example which is illustrative of the practical application of the “time deductible” in business income claims.

Business Income—Time Deductible

Q

An insured has had a partial business income loss and we are uncertain what to expect of the loss adjustment with the seventy-two hour time deductible now in our contract. The coverage is written with a monthly limit of $50,000 for the first month. As the loss is partial, is it the amount of actual loss for the first three days that is deducted, or is the deductible amount apportioned for the month? Furthermore, since the loss occurred on a Friday night and the insured does not operate on Saturday and Sunday, when does the seventy-two hour deductible begin? Is it seventy-two hours of normal operation that is deducted, or is our insured just lucky because the firm will really experience only the effect of a one-day deductible on this loss? Can you clarify this?
Dominican Republic Subscriber

A

According to the terms of the Insurance Services Office form for business income coverage (CP 00 30 06 95) recovery is keyed to a defined "period of restoration." For business income (not extra expense) that definition says the period does not begin until seventy-two hours "after the time of direct physical loss or damage." Thus, whether partial closure or complete shutdown occurs, there is no recovery of any business income loss during the first seventy-two hours. If there is no loss of business income during the period, or a reduced loss occurs because the business is normally closed during all or part of the time of the "period of restoration," the insured is lucky.
Extra expense is treated differently because the object is to do whatever is necessary to get the business up and running again. If by immediate action, such as hiring an emergency crew of workers and paying for express delivery of goods and materials, the period of interruption can be reduced, insured and insurer both benefit.

However, the term “time deductible” as referred to in this blog, is to be considered a waiting period and not a formal deductible that could conflict with certain policy language. Another FC&S Bulletin explains the formality:

Waiting Period Not the Same as a Deductible

Q

Our insured had a business income loss that resulted in a twenty-eight hour closure. The property deductibles section of the policy states that no deductible applies to business income and extra expense coverage. However, the policy also states that the business income coverage is only available during the period of restoration, which does not begin until twenty-four hours following the time of direct physical loss. We think these two provisions are in conflict. What are your thoughts?

Ohio Subscriber

A

The deductibles section of the policy refers to the monetary deductible amount that the insured agrees to pay in the event of a covered loss. The twenty-four hours prior to the beginning of the period of restoration for the business income loss is a waiting period during which the coverage does not apply. Because the waiting period is not a deductible, the two provisions are not in conflict.

A recent FC&S Bulletin exemplifies a common loss-of-rent scenario after a loss:

Loss of Rents and Business Income Loss for Multiple Insureds

Q.
We have multiple named insureds on a property policy with business income and extra expense coverage, including loss of rents. One named insured (ABC) rents all of the locations to another insured. If a business income loss occurs, can both ABC collect for its loss of rents and the other named insureds collect for their actual income loss and extra expenses?

Iowa Subscriber

A.
Yes, the policy would allow ABC to recover for the loss of rents and the other named insureds to collect for their business income losses and extra expenses. Of course, if the other named insureds claim rent payments as part as their continuing expenses, then ABC cannot also collect for loss of rents. But if there is no overlap in what they each claim, they should all be able to recover their losses.

Consider, however, a similar situation where the outcome is entirely different. In Mirlan v. Affiliated FM Ins. Co., No. 09-55662, 2010 WL 4462728 (9th Cir. November 8, 2010), a fire rendered three tenant spaces untenantable. Under the impression that it had purchased coverage for “Loss of Rents,” the commercial property owner-corporation represented to its tenants that they would not have to continue paying rent. The tenant leases, however, provided that the tenants were required to continue paying rent even if fire made the spaces untenantable or there were repairs made to the property. The leases also required the tenants to purchase business interruption insurance. Based on the tenant agreements, the insurance carrier denied coverage for the loss of rental income sustained after the landlord agreed to abate the rent payments.

The “loss of rent” provision at issue stated in pertinent part:

[T]he actual loss of income sustained by the insured resulting directly from the necessary untenantability, caused by loss, damage or destruction by any of the perils covered herein ... to real or personal property.

Although it was undisputed that the fire caused the untenatability of the rented spaces, the court found that loss of income was caused by the owner’s own conduct of abating the rent payments.

Notwithstanding the standard practice of calculating property manager’s fees as a continuing expense of the business operation, I came across an interesting article in the FC&S Bulletin regarding the recoverability of these fees that is worth sharing so that everyone can avoid similar coverage disputes:

Business Income—Status of
Management Fees?

Q
Many of our clients have property management firms who manage their apartment buildings and commercial properties for a percentage fee based on rental income. Frequently, the management agreements call for the firms to be paid an additional fee for any construction management services performed following a property loss.

In our opinion, both these fees should be covered as part of the property owner's business income loss following a covered property loss. However, following a recent covered loss to a large commercial complex containing many leased offices, the adjuster refused to allow either the continuing management fee or the additional fee, stating that both of these were "agreements outside the policy" and therefore not covered.

Specifically, the adjuster pointed to exclusion 4.c.(2) of the CP 10 30 06 95, which eliminates coverage for certain contractual liability assumed by the insured. Not only did he disallow coverage for the additional fee, but for the on-going management fee as well.

Our insured has the [sic.] with business income and extra expense CP 00 30 06 95 attached.

What do you think?

Texas Subscriber

A

The covered direct physical loss to the insured property is the trigger for business income coverage. In the CP 00 30 business income and extra expense form, the insurer promises to pay the net income that would have been earned and continuing normal operating expenses, including payroll.

There is no descriptive or restrictive language in the form detailing what "normal operating expenses" are comprised of. And, although the adjuster may think that this "operating expense" does not continue because there is nothing to manage, this is not necessarily the case. For example, when property is completely destroyed, then maintenance expense—money paid to an outside firm—for building and machinery might discontinue. However, these expenses might well continue if the property is only partially destroyed and if the insured is obligated by contract to continue payment.

The ongoing management fees may be viewed in the same light. If the management fee does not discontinue in event of a covered loss, it therefore is a part of the normal operating expense covered by business income.

The second part of the business income coverage is for extra expense. The CP 00 30 defines extra expense as "necessary expenses [the insured] incur[s] during the 'period of restoration' that [the insured] would not have incurred if there had been no direct physical loss or damage." Further, the extra expense must be for the purpose of avoiding or minimizing the suspension of business and allowing the insured to continue "operations" at the described premises.

The management company's function in this instance is to supervise the leased space construction; since the management company is presumably in a better position to expedite the restoration of the damaged building, the adjuster cannot arbitrarily disallow the fee. If the management company's intervention minimizes the suspension of business by making sure the premises are restored quickly to the preloss condition, then the fee is covered.

The adjuster's citing of exclusion 4.c.(2) is inappropriate, since this exclusion is prefaced by the language (under 4. special exclusions) that "the following provisions apply only to the specified coverage forms." Exclusion 4.c.(2) relates to the legal liability coverage form; specifically the insured's assumption of liability in a contract or agreement. The exclusion precludes coverage, for example, for a hold harmless agreement in which the insured assumes liability rightfully belonging to another. It is not applicable in this situation.

As stated in the FC&S Bulletin, property manager’s fees incurred after a loss to assist in the mitigation of damages above may also be recovered as an extra expense under the policy. A standard extra expense coverage form states "extra expense" means" necessary expenses you incur during the 'period of restoration' that you would not have incurred if there had been no direct physical loss or damage to property." These extra expenses include those "to avoid or minimize the suspension of business and to continue 'operations' at the described premises, or at replacement premises or at temporary locations."

It is also likely that courts will allow recovery of the property manager’s fees. For example, in  Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted coverage for security expenses to avoid theft of a damaged business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials was not.

Q

I insure a bill-collection agency on a business owners policy, form BP 00 02. The agency's automatic dialing system was struck by lightning and damaged. The direct damage loss was covered.

However, the system could not be replaced immediately, so temporary employees were hired to place manual calls. The insurer paid these employees under the BOP's extra expense coverage. The agency owner now is making a business income claim, but I don't think business actually was suspended. It just was slowed down.

Should business income coverage apply?

Missouri Subscriber

A

Business income coverage is not triggered. The BOP policy provides business income for losses that are caused by the necessary suspension of operations, but it does not define suspension. In such cases we must refer to the plain meaning of the term. Webster's Revised Unabridged Dictionary defines "suspend" as "to cease from operation or activity." Suspension is defined as the "act of suspending."

The situation is a change in the method of business but not a suspension. Only extra expense is payable.

While many carriers require a “total cessation” in order to trigger coverage under a business income provision (not extra expense), some courts have disagreed with this “all or nothing” approach.

In American Medical Imaging v. St. Paul Fire & Marine Ins. Co., the insured’s business was damaged by fire. The insured immediately rented space at an alternative site and relocated the next day to a place with substantially fewer telephone lines, which were essential for the business’ operations. The insured did not return to its headquarters for approximately six weeks.

St. Paul denied the claim, citing the fact that no suspension of business occurred, and a lawsuit followed. American Medical lost at the trial level, but prevailed on appeal. Under a provision similar to the one cited above, the court ruled in favor of American Medical:

Under the district court's construction of the policy, the insured would have no motivation to mitigate its losses. Continuing in business at any level would bar recovery because the insured would be carrying on the same kind of activities that occurred at the covered location. We decline to accept the suggestion that this was the intent of the parties. Indeed, other provisions of the policy bear witness to a contrary intent. For example, the policy imposes on the insured an affirmative duty to mitigate its losses:

If you can reduce your loss by resuming operations at the covered location or elsewhere by using damaged or undamaged property ... you agree to do so.

Under the district court's reading, this provision would have imposed upon AMIC a duty, the performance of which would have forfeited its right to recover under the policy. We are confident that such an anomalous result was not intended and choose to read the policy terms regarding St. Paul's duty to indemnify as consistent with AMIC's duty to mitigate.

American Medical points out the problem at the heart of the “total cessation” approach: the insured can be punished for attempting to mitigate its own loss, as well as the insurer’s potential loss. Vincent Morgan’s article in CAT Claims: Insurance Coverage for Natural and Man-Made Disasters, explains that while the “total cessation” approach may have some logic, it also has significant shortcomings:

1. Failing to accurately address the realities of large businesses that operate worldwide on a “round the clock” basis that would never cease operations;
2. Creating perverse incentives for insureds to enhance their insurance recovery by not taking all possible steps to maintain partial operations, increasing the loss and decreasing economic output; and
3. Creating inconsistent obligations for insureds because of the corresponding duty to mitigate, leaving an insured that can mitigate a loss by maintaining partial operational capabilities without coverage due to the lack of total cessation.

If you suffer a business interruption loss, I recommend contacting a professional right away to work with your insurer to determine how you can most effectively use your insurance and protect your business.

A major expense for any organization is employee payroll and benefits (if directly related to payroll and paid by the organization: FICA payments, union dues, and workers compensation premiums) and one that must be reviewed and understood prior to loss as to the extent, if any, that should be continued during the period of restoration. An organization can decide to treat all payroll and benefits as a continuing expense and not remove it from the worksheet and thereby include all within the limit insured. Some organizations may decide that it can lay off certain employees that are not critical for the organization's recovery during the period of restoration. Each organization is different in terms of employee skills, local job markets (low or high unemployment), and cost to retain new employees when prior ones are not available for rehire.

The typical approach for most organizations is to decide what class(es) of employees should be paid during the period of restoration and which ones should not. Most insurers use the term "ordinary payroll" to define that which may be excluded totally or paid for a specific period of time (90 days, 180 days, etc.) by the named insured. Ordinary payroll is a term defined by ISO in form CP 15 10 06 07 as "payroll expenses for all your employees except: officers; executives; department managers; employees under contract; and additional Exemptions, shown in the Schedule as: Job Classifications; or employees." It is possible that certain employees by name or class may fall within the definition of "ordinary payroll" but the organization deems their contribution to be needed during the period of restoration. An exemption to the broad definition of "ordinary payroll" can be used in order to continue payroll and benefits for these key employees. ISO Form CP 15 04 06 07 Discretionary Payroll Expense is used for this purpose.

I find that an example from the National Underwriter FC&S Bulletins is always helpful in understanding the practical application of certain policy endorsements:

Business Income and Ordinary Payroll

Q

A client I handle purchased business income coverage through ISO form CP 00 30. Endorsement CP 15 10 was attached to limit coverage for ordinary payroll to six months. This insured suffered a covered loss and was partially shut down for nine months. I believe he should be allowed to recover ordinary payroll expenses during the entire nine months because the company was only partially shut down.

The insurance company has disallowed ordinary payroll expenses past the six-month time frame. Is that correct?

Ohio Subscriber

A

The standard business income form CP 00 30 provides coverage for the actual loss of business income during the "period of restoration" which, in this case, would be nine months. The form defines business income as net income that would have been earned or incurred had the loss not happened and continuing normal operating expenses incurred, including payroll. Endorsement CP 15 10 limits coverage for ordinary payroll to the period stated on the endorsement.

Since this insured limited ordinary payroll coverage with the endorsement to six months, only the amount accrued during the six-month period of the shutdown can be included in the loss settlement.

Also illustrative is the trial court’s ruling in Consolidated Companies, Inc. v. Lexington Ins. Co., 2009 WL 211751 (E.D. La. 2009). Although this opinion was vacated and remanded by an appellate court on other grounds, the trial court was affirmed on the accounting principles involving the calculation of net profits to the exclusion of ordinary payroll in a case where the business partially resumed operations to minimize its business losses:

Lexington contends that the jury award of $7,071,120 in lost profits as part of the business-interruption claim improperly compensates Conco for its ordinary payroll, which is not covered under the policy. Lexington argues that Conco's computation of its claim for lost profits, by subtracting its actual profit in the aftermath of Hurricane Katrina of $279,006 from the profit it would have otherwise earned is an “end-run” around the exclusion for ordinary payroll. Specifically, Lexington argues that, by deducting $12,900,000 of ordinary payroll in calculating actual net profit, which Conco then subtracted from “but for” profit to compute damages, Conco increased its lost-profit recovery by $12,900,000. Lexington argues that the amount of Conco's net profit after resuming operations must be calculated independently of the amount Conco spent on ordinary payroll. When net profit is calculated this way, argues Lexington, Conco suffered no covered “actual loss” under the policy.

There is no provision in the policy under the “Resumption of Operations” provision that, in calculating the actual profit or loss sustained by the insured during the period of restoration, the net profit prevented from being earned be reduced by ordinary payroll paid during the resumption period. Conco generated over $205,000,000 in revenue when it resumed operations and spent $12,900,000 of that revenue on ordinary payroll. In determining the net profit earned of $279,006, ordinary payroll was properly deducted from the revenue generated during the resumption of operations.

On the issue of tanning beds and extra expense coverage, the FC&S Bulletin published the following:

Extra Expense for a Tanning Salon

Q

The insured owns a tanning salon. He is insured on a standard commercial property form, with the CP 00 50 04 02, Extra Expense, endorsement. There is no business income endorsement. Many of his customers pre-pay for a number of sessions, or have monthly fees directly taken from their credit cards.

He suffered a covered loss in which four out of the seven beds were rendered unfit for use. In order to keep his business alive (particularly in the light of many customers having pre-paid), he contracted with another tanning salon for his customers to use the other salon's tanning beds. He paid the other salon $8 per person/per session, which is what his customers paid.

When he submitted this expense to the insurance carrier, however, the claim was denied. The adjuster stated this was a business income loss and not covered. May we have your opinion?

Pennsylvania Subscriber

A

The extra expense coverage form states "extra expense" means "necessary expenses you incur during the 'period of restoration' that you would not have incurred if there had been no direct physical loss or damage to property." These extra expenses include those "to avoid or minimize the suspension of business and to continue 'operations' at the described premises, or at replacement premises or at temporary locations."

Since the insured has, through contracting with another tanning salon to serve his customers, incurred expenses he would not otherwise have had, there is coverage. He has minimized the suspension of business through this arrangement. Further, the endorsement does not state the insured must own, rent, or lease the "replacement premises," so the use of the other tanning salon becomes the insured's business's "temporary location."

Other popular “extra expenses” could be temporary office space, temporary computer systems or furniture for the temporary space, overtime for workers who need to spend additional time outside of their normal workday due to the covered event. If employees were not able to bring their lunch to work because the employee’s lounge/kitchenette was burned in a fire, an extra expense claim could be made for feeding them during this time period.

For example, in Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted coverage for security expenses to avoid theft of a damaged business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials was not.

It is also important to note that, as with most insurance policies, the insured has a duty to mitigate its damages after the loss and that Extra Expense Coverage allows the insured to recover a measure of the incidental costs expended in trying to mitigate damages pursuant to the terms and provisions of most insurance policies.

At our firm, we subscribe to the FC&S Bulletins, published by the National Underwriter Company, among many other reliable coverage resources, to help our clients make sense of it all. The following bulletin made me think of the many times we have turned a “No” into a “Yes,” especially in the “loss or damage” debate in business interruption claims, as discussed in Does an Insurance Policy Cover only “Loss” or “Damage” to Property? and The "Loss" or "Damage" Coverage Requirements - A Business Interruption Afterword - Understanding Business Interruption Claims, Part 31.

Theft and Loss of Business Income

Q

Our insured, a jeweler, has a business owners policy (BOP), ISO form BP 00 02, which excludes merchandise for sale. A jeweler’s block policy covers the merchandise. The BOP provides for business income coverage when the building or personal property is damaged as a result of an insured peril.

During an armed robbery the gunman fired a shot into the floor damaging the carpet and floor. Of course, that did not cause the interruption; the thief took all the merchandise, which did cause the interruption.

The company says the damage must cause the interruption, and since merchandise is excluded, there is no coverage. They said "as the property damage to carpeting and floor does not cause an interruption of business or the untenantability of your premises, there is no coverage for loss of income."

This might be the intent of the people who wrote this form, but it does not say that. It says only that coverage is triggered when there is damage.

Who is right?

South Carolina Subscriber

A

The BOP business income coverage applies to the actual loss of business income that is due to the necessary suspension of the insured's operations during the period of restoration. The suspension "must be caused by direct physical loss of or damage to property at the described premises."

Note that the damaged property does not have to be "insured" by the BOP; it only has to be located at the premises described in the policy and damaged by any BOP peril.

There need only be damage to any property at the insured location. The most common occurrence of this kind involves a tenant whose business is closed when the landlord's building is damaged by fire. Even though there is no damage to the tenant's own property that is insured by the BOP, there has been damage to property by a covered business-owners peril (fire); the business-owners policy covers the tenant's loss of income during the closing.

In the case cited, the theft of the jewelry is a loss to personal property at the premises as a direct result of an insured peril (theft). The fact that the jewelry is not insured by the BOP does not matter. In addition, the damage to the carpet and floor by the gun shot also is sufficient to trigger coverage under the present wording.

Never give up…

Over the past several years, we have noticed a growing trend of adjusters and legal counsel for insurers asking for multiple proofs of loss. Many of these requests are months and sometimes years following the loss. The insurance company attorneys probably are trying to protect their clients and avoid interest penalties for delayed claims payments under many state statutes.

The FC&S Bulletins discussed the issue of multiple proofs of loss demands in its August 5, 2010, Question and Answer. The question posed was the following:

Our insured was asked to submit a proof of loss. They did and the adjuster rejected it on the grounds that he disputed the values. Additional discussions and estimates followed increasing the value of the claim over that which was noted on the 1st proof of loss.

The adjuster has asked the insured to submit a second proof of loss. The claim has become adversarial and the adjuster has threatened the insured with an EUO. Having complied with the initial request for a proof, does the carrier have the right to ask for additional proofs? How often and under what circumstances are multiple proofs of loss permitted to be requested by the carrier?

The current Business Owners form clearly contemplates one proof of loss because it says the insured, at the request of the insurer, must send "a" proof of loss. The old standard fire insurance policy, at line 35, required "a statement" of various items to be included for proof of claim. I have not seen a policy that requires proofs of loss to be filed, but I bet insurance company attorneys will argue and threaten that failure to complete them is a breach of the cooperation clause.

The answer provided by the FC&S is sound regarding this issue:

The policy has no language regarding the number of proofs of loss a carrier may ask for; the duties after a loss simply state that within 60 days of the carrier’s request the insured submit a signed, sworn proof of loss which to the best of his ability states the nature of the loss, date, values, inventory of damaged property, etc. If the adjuster disputes the values, I don’t see what another proof of loss is going to do; he’s trying to artificially force the insured to adjust his claim. An appraisal would be proper in this situation, as either party has the ability to request one if the carrier and the insured fail to agree on the amount of the loss. (emphasis added)

As ususal, I strongly suggest that all adjusters and those involved with property insurance subscribe to the FC&S Bulletins. It is a fantastic resource.

Chris Boggs in his book Business Income Insurance Demystified: The Simplified Guide to Time Element Coverages, explains the dire scenario as follows:

During the period of restoration, the insured’s customers and clients may find alternate sources for the goods, services or products the insured provides. In so doing, those customers may have developed new buying habits or entered into a replacement contractual relationship with another entity. Regaining those customers and the revenue they represent takes time. Replacing the customers and clients with new buyers requires even more time.

Business Income Coverage Form (and Extra Expense) CP 00 30 06 07 and Business Income Coverage Form (without Extra Expense) CP 00 32 06 07 provide indemnification beyond the period of restoration for the difference in income for up to 30 consecutive days or when the business generates the same amount of income that would have been earned had no loss occurred, whichever occurs first.

An article in the FC&S Bulletin is illustrative:

Business Income Coverage—Restaurant Closed due to Robbery

Q. Our insured owns a small restaurant that was robbed at 9:30 on a Saturday night. Everyone was locked in a cooler by the robbers while they emptied the cash drawer and smashed the computer that operates the cash register and customer order system. Because the computer was down, the restaurant remained closed Saturday night and did not open again until its normal opening time of 11:00 Monday morning. The computer was fixed by this time. The insured carried an open perils business income coverage form (without extra expense) and the extended business income option. The insurance company paid the business income loss for the balance of Saturday night and Sunday, but refused to honor the extended business income option for the decrease in business the insured suffered during the week following the robbery. Business was down one third that week.

The insurance company argues that the decrease in business during the week following the robbery was due to fear of bodily injury in the minds of potential patrons and was not caused by the time required to repair the physical damage to the computer. They maintain that the short-term closing was not long enough to cause the loss of customer base intended to be covered by the extended business income option. We feel that the extended business income coverage should apply.

-Ohio Subscriber

A. All of the elements required for a covered extended business income loss are present in your insured's loss. Business was suspended because of direct physical loss or damage to the computer ordering system. The loss was covered by a covered cause of loss. The insurance company admitted this by paying the business income loss suffered from Saturday night until Monday morning. An additional loss of business income began on the date the property was repaired and operations were resumed and ended at the end of the week when the insured's operations were restored to the condition that would have existed if no direct physical loss or damage occurred.

The insured does not have to establish the motives of the customers who stayed away from the restaurant because the policy does not require it. The insurance company's presumption that customers stayed away out of fear of bodily harm is irrelevant, as is the presumption that the restaurant was not closed long enough to lose its customer base. All that is required is a covered loss and a decrease in business during the time period allowed by the policy. These conditions were met by your insured's extended business income loss.

In non-catastrophic losses, Extended Business Coverage can mean the difference between shutting down or staying alive after a loss. However, this time element coverage warrants a caveat.  Chris Boggs warns:

Extended Business Income protection will not allow and is not designed to help the insured recover income lost due to externally poor economic conditions present following the insured’s return to operations. If the insured’s ability to return to pre-loss income levels is stunted buy the surrounding community’s economic condition, the coverage extension does not apply

"The most important thing is the court realized the key thing to look for is to identify the "loss," because that is what the policy covers, not "damage." The Supreme Court also well understood that once loss has occurred and is covered, it can never become uncovered no matter what happens later." (emphasis added)

When considering a policy that covers "accidental physical risks of loss," I wonder what a "loss" would be if there were no "damage" that occurred with it. I cannot think of such a situation. Therefore, I do not think Rossmiller is right. When advocating for his insurance company clients, I am certain Rossmiller would argue that there must be "damage" for a "loss" to occur.

Indeed, this situation arises in many cases where adjusters determine whether "damage" is pre-existing (resulting from wear and tear) and not covered or caused by a non-excluded peril and covered. "Causes" of loss necessarily means "physical damage" in most property insurance policies, and this is what adjusters and courts should focus upon when considering coverage issues involving concurrent causation language. Property can be damaged by a sequence of causes.

For those who want a practical perspective about anticoncurrent clause situations, I suggest Concurrent Causation Analysis Applied by FC&S---Learning From an Insurance Industry Source. Additionally, as I noted in the comment I wrote for the Mississippi Law Journal and cited in Anticoncurrent Causation Clause Explained in Relation to Hurricane Losses, Rossmiller wrote excellent discussions of the topic for more academic types.

Business Insurance indicated in part the following:

BP will bear the cost of the cleanup, which could top $3 billion, experts say. In addition, at least 70 liability lawsuits have already been filed seeking damages from BP; Zug, Switzerland-based Transocean Ltd., which owns the rig; Houston-based Halliburton Co., which cemented the oil well; and Houston-based Cameron International Corp., which manufactured the wellhead equipment.

Of those firms, legal experts said BP likely would foot much of the bill. But it's also possible that a government fund, financed through taxes on energy companies, could pay some of those damages, because U.S. law currently limits energy companies' liability to $75 million per spill.

Companies exposed in the accident are insured for $1.4 billion in losses under business interruption, general liability, pollution liability, control-of-well, property and workers compensation coverage, according to the New York-based Insurance Information Institute.

The spill likely will generate extensive claims from downstream entities affected by the pollution, including fishing and tourism operations. In addition to damages sought in litigation, many also may file claims under their own business interruption, contingent business interruption and similar policies, legal experts said. Generally, claimants are entitled to liability damages only if pollution touches their property, said Richard Hobbie III, president of New York-based underwriter Water Quality Insurance Syndicate. Business interruption claims might not have such a restriction and could arise further downstream, such as a New England restaurant that imports seafood from the Gulf Coast, he said.

The Gulf of Mexico produces more seafood than the entire East Coast from Maine to Florida, according to the Corpus Christi, Texas-based Harte Research Institute for Gulf of Mexico Studies. The institute estimated conservatively that the oil spill endangers $1.6 billion of tourism, recreational and commercial fishing, and economic benefits from coastal wetlands.

Business interruption policies typically appear within a commercial property policy, so such claims will depend on the definition of property, which often excludes land, such as a beach at a coastal hotel, said Marshall Gilinsky, a New York-based attorney and shareholder at Anderson Kill & Olick L.L.P. “If the only thing damaged at the resort is the waterfront, I won't be surprised if the insurance company argues, "We don't insure the water offshore of your property and therefore...your property insurance policy is not triggered, including business interruption,'” Mr. Gilinsky said. (emphasis added)

I think the losses will be far in excess of this figure unless BP figures out how to stop the flow of oil immediately. Over the weekend, the containment dome failed. In addition, while it has not been determined where they came from, tar balls started washing up on Alabama's Dauphine Island. Here is a YouTube video:

I also agree with Gilinsky. I noted in First Party Property Coverage for the Oil Spill to Shoreline Owners that:

A second major issue will be whether "physical damage" to "insured property" has occurred. Many policies define "property not covered" to include "roadways, other paved surfaces, land, and foundations." Direct damage to "insured" or "covered" property is generally a requirement to trigger coverage. So, even if the property policy may provide some limited coverage for the extraction of the oil, most can anticipate litigation over whether the property and economic loss is covered under the property and business income forms and whether the oil damage to property is not covered because it was uncovered "land."

Still, a number of attorneys in our firm are questioning whether the oil, spilling from the oil well, is a "polluntant," as defined under various property insurance policies. The FC&S has an excellent article, Homeowners Pollution Exclusions: The ISO and AAIS Forms. I suggest that coverage counsel subscribe to this service and carefully read the entirety of it. The policies define "pollutants:"

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals, and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

I imagine many will argue that unrefined oil is not a "pollutant," as defined in the policy. The article does not say whether oil is or is not a "pollutant." Instead, its conclusion tends to indicate exactly what the title to this post implies:

Pollution, how it’s defined and how courtsview the policy exclusions are still large issues for the insurance industry. Many of the cases referred to in this article have been disagreed with by other cases, but the net result is that the courts are still divided on the definition of pollution and the application of the exclusion in homeowners policies. The definitions of pollution and the exclusions have changed over time; but the issue remains unresolved.

This insurance coverage issue is going to be a messy and a very costly one.

Clients involved in these types of claims often ask if the cost of accounting is recoverable after the claim is resolved.

While the typical answer to this question is “It depends,” The FC&S Bulletin addresses and clarifies the question as follows:

There is nothing in the wording of the business income portion of the policy [CP 0030] that obligates the insurance company to pay the insured's accounting cost to determine the extent of the business income loss. The policy promises to pay for "the actual loss of Business Income you sustain due to the necessary suspension of your 'operations' during the 'period of restoration.'" Business income is defined in the policy to mean "a. Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and b. Continuing normal operating expenses incurred, including payroll." The accountant's fee is neither net income nor continuing normal operating expenses.

Now, CP 00 30 also provides extra expense coverage and some may argue that this coverage would apply to the accounting documentation charges. The argument goes that extra expense is defined to mean necessary expenses that the insured incurs during the period of restoration that would not have been incurred if there had been no direct physical loss; and, the accounting fees in question would not have been incurred had there been no loss. Furthermore, the policy also requires that the extra expense be incurred to avoid or minimize the suspension of business and to continue operations. Since it is fair to assume that the insurance company would not have paid the business income loss if the insured had not submitted the requested accounting information, and since the insured's business would have continued to be suspended or operated at reduced income if the insured had not been paid for the business income loss, the accounting documentation was a necessary expense to continue the insured's operations.

We do not agree with such an interpretation of the extra expense coverage. However, one of the duties of the insured in the event of loss is to cooperate with the insurer in the investigation or settlement of the claim. If the insurer requests that the insured provide accounting documentation to support a claim, this can be seen by the insured as a duty required of him by the insurer. And, it is reasonable for the insured to assume that the insurer would pay for the insured's costs in performing this duty. The policy's terms do not require such a payment, but the costs the insured incurs while cooperating with the insurer should be taken into consideration in the final settlement of the claim.

So, how about a review of that exciting "Volcanic Activity" provision in the basic, broad, and special CP forms? If the recent Hard Rock Casino advertisement series about "you know who you are" has any truth, those still reading this post know they are the true insurance coverage nerds everybody in the office consults when a hard coverage issue arises.

The basic and broad "causes of loss" form covers "volcanic activity" with the following language:

11.Volcanic Action, meaning direct loss or damage resulting from the eruption of a volcano when the loss or damage is caused by:

a. Airborne volcanic blast or airborne shock waves;
b. Ash, dust or particulate matter; or
c. Lava flow.

All volcanic eruptions that occur within any 168-hour period will constitute a single occurrence.

This cause of loss does not include the cost to remove ash, dust or particulate matter that does not cause direct physical loss or damage to the described property.

The FC&S notes that: 

Volcanic action coverage also was previously available only on an optional basis by endorsement. As a basic cause of loss under the ISO commercial property program, it covers damage from the above-ground effects of a volcanic eruption—airborne blast and shock waves, ash, dust, particulate matter, and lava flow. It does not include, as detailed in the earth movement exclusion, the removal cost of volcanic ash or dust that has not physically damaged insured property, nor the seismic effects of a volcanic eruption.

Coverage under this cause of loss applies to any volcanic eruptions occurring within a seven day period (168 hours). Under the original versions of the form (prior to the 1988 revisions), this period was three days.

The special form policy covers all the "risks" of direct physical loss unless excluded. While it then excludes volcanic eruption, the form then excepts the exclusion for "volcanic activity" to provide this coverage:

(5) Volcanic eruption, explosion or effusion. But if volcanic eruption, explosion or effusion results in fire or Volcanic Action, we will pay for the loss or damage caused by that fire or Volcanic Action.

The bottom line is that many ash claims will likely be denied because insurers claim that the volcanic activity or ash did not result in any "physical damage." If you happen to have that problem, "you know who you are" and who you need to call.

Have a great day!!

What generally "happens," is the insurance company limits the period of restoration to the time that the business decision is made not to re-open or the business is sold. I then get a phone call asking if the insurer can do this. As usual, the best place to start such an analysis is to read the relevant policy language and then check an authoritative source. In this case, I will use IRMI.com, which everybody who claims to be a "professional" in insurance coverage and claims should subscribed to, along with the FC&S Bulletins.

The form CP 00 30 reads:

c. Resumption Of Operations

We will reduce the amount of your:

(1) Business Income loss, other than Extra Expense, to the extent you can resume your "operations," in whole or in part, by using damaged or undamaged property (including merchandise or stock) at the described premises or elsewhere.

(2) Extra Expense loss to the extent you can return "operations" to normal and discontinue such Extra Expense.

d. If you do not resume "operations," or do not resume "operations" as quickly as possible, we will pay based on the length of time it would have taken to resume "operations" as quickly as possible.

Demonstrating its value and proving why it should be subscribed to, the IRMI.com has a specific discussion of both issues:

Election Not To Resume Operations. Note that the resumption of operations provision does not require the insured to resume normal operations as soon as possible. Instead, it establishes that the insured's business income or extra expense loss will be calculated based on the amount of loss that would have been suffered if the insured had resumed normal operations as soon as possible. Thus, an insured who elects not to resume operations at all is entitled to a recovery for the business income that would have been earned or the necessary extra expenses incurred during the time it should reasonably have taken to resume normal operations. The same is true of an insured who does not resume operations as quickly as possible.

Sale of Property during Period of Restoration. In BA Props., Inc. v. Aetna Cas. & Sur. Co., 273 F. Supp. 2d 673 (D.V.I. 2003), Hurricane Marilyn damaged the insured's hotel in the U.S. Virgin Islands. While the hotel was undergoing repairs, the insured sold the facility. The insurer argued that the sale of the hotel during the period of restoration terminated the insured's right to receive further business income coverage. The court disagreed. The court held that the amount of the insured's business income loss was fixed as of the time of the hurricane to the amount of lost profits that would have been earned during the period of restoration. The court noted that the business income policy did not expressly require that the insured actually recommence business activities at the hotel as a prerequisite for coverage. If the insured decided to shut the hotel for good after the hurricane, the insurer would still have been obligated to pay the entire business income loss through the entire time it would have hypothetically taken to rebuild and reopen the hotel. Selling the hotel midway through the period of restoration was no different than belatedly deciding to shut it down. In either situation, the insurer was still obligated to pay out the rest of the business income loss. (emphasis added)

Sometimes, a catastrophe is the perfect time to close or sell a business. Commercial policyholders that make such difficult business decisions can still obtain significant business income benefits which many insurance adjusters may otherwise deny.

My experience is that many insurance company adjusters lack the thorough understanding of finance, business management, and accounting required to properly adjust commercial business income and extra expense claims. Most commercial adjusters never do, and lack the skill to do, the income and extra expense calculations themselves. Instead, usually after a delay, the business income claim is referred to insurance accounting firms that provide the analysis only of the numbers, without also having the business operational skills needed to properly determine the amounts owed.

I suggest that unless the commercial claims representative immediately explains the broad benefits potentially available and shows a willingness to fully pay for them, most commercial policyholders need to promptly retain professional help. Often, an insurance agent or broker has a much more thorough understanding of how the insurance product, through business income and extra expense benefits, can potentially save a business from closure. Still, at this most crucial time following a loss, many commercial policyholders have to wait months to get agreement or payment of these benefits. Closures as a result of these delays can be prevented by insurance companies understanding their products and getting money, the lifeblood of any business, back into the business as soon as possible.

An article in Claims Magazine, Hell Hath No Fury, indicates just a few coverage considerations that may occur as marital relationships end. The most immediate impact of separation or divorce is usually upon the definitional aspects of who is covered. As explained in the article:

Let’s start at the beginning. The ISO HO 00 03 states that “you” and “your” refer to the “named insured” and  the spouse if a resident of the same household. The definition of “insured” states that residents of the household who are relatives or persons under the age of 21 in the care of any person (an insured) is also an insured.

The article pointed out some scenarios and issues worthy of consideration and demonstrating why insurance coverage must be addressed:

But what about separating spouses? Joint property is always a problem. When the relationship dissolves, both parties may be tremendously attached to the plasma TV or the leather sofa. Most property does not obviously belong to one party or the other except for perhaps jewelry and clothing (in most cases, the silk lingerie does not belong to the gentleman). It’s one thing if a party can prove that they purchased the property. But if the couple had a joint account and bought items jointly, the property belongs to both and the courts may have to make the ultimate decision.

Let’s look at another example. The named insured separated from his spouse and she left the residence. While the insured was away for three weeks, a neighbor was watching the house and pets. The wife talked her way into the house via the neighbor and also broke in on a separate occasion. The wife took all the personal property, appliances, and furniture from the dwelling. After the wife took the property, the insured obtained a judgment granting the dissolution of the marriage and stated that he owned all the property in question. Was the removal of the property a theft or just an ugly disagreement between spouses?

This is one of those situations where the definition is crucial to the solution. The policy doesn’t define theft, so back to the dictionary we go. Merriam Webster Online defines “theft” as the felonious taking and removing of personal property with intent to deprive the rightful owner of it. The wife certainly did take all the property intending to deprive the husband of it, although she might be able to make a case that he did not own everything, even though he obtained a judgment that stated so. Being married doesn’t mean that your actions toward your spouse can’t be nefarious. Since she was no longer a resident at the time of loss, although she was the spouse, she was not an insured. Therefore the intentional-acts exclusion is out. While this is an ugly marital dispute, it is also a theft and should be covered as such.

As you can see, a resident isn’t necessarily an insured. A spouse who moves out is legally still the spouse, but she is no longer an insured person. This is only the tip of the iceberg regarding significant others, but it does illustrate that resident spouses, or resident blood relatives, are considered insureds under the policy, and that non-resident spouses, and resident significant others, are just other people, same as you and me.

Not directly discussed, but implied to be of significant coverage importance in that article is the definition of "residence premises" or "insured premises." Those definitions may affect coverage whenever an insured leaves a home that was the person's "residence." This is discussed in the FC&S Question and Answers, Named Insured does not Occupy Residence Premises—One and Named Insured does not Occupy Residence Premises—Two. The FC&S discussion notes the following from those:

"The ISO homeowners policy HO 00 03 10 00 states that coverage is available if that part of the "residence premises" rented to others or held for rental is not fit to live in. "Residence premises" is defined as the "one [or two, three, or four] family dwelling where you reside [in at least one of the units], or that part of any other building where you reside."...

"Insured Premises" [under the AAIS form] means, for property coverage, "Described Location: If "you" [the insured named in the declarations] own and reside in the 'residence' shown on the 'declarations' as the described location, the 'insured premises' means: 1) that 'residence'; and 2) related private structures and grounds at that location." The insuring agreement for Coverage A states that "'We' [the insurer] cover the 'residence' on the 'insured premises'." "Residence" means a "one to four family house…used mainly for residential purposes."...

The principle of homeowners coverage requiring ownership and occupancy by the named insured appears to be upheld. See, for example, the case of Bolivar v. Blue Ridge Insurance Company, 1999 WL 989585 (Unpublished Conn. Super. 1999), where the Court held: "It is apparent that the subject homeowners policy, when read as a whole, was written to insure premises where the insured resides or dwells, as those terms are most commonly used. The term "homeowners policy," in and of itself, is not ambiguous. Rather, the common usage of the term implies insurance coverage for the insured's home, residence or dwelling….the requirement that the insured reside in at least a part of the premises is constant."

Likewise, in Heniser v. Frankenmuth Mutual Insurance, 534 N.W. 2d 502 (Mich. 1995), the insured sold a vacation home under a land contract and two months later the property was destroyed by fire. The court held that the "provision in homeowner's insurance policy definition of 'residence premises,' wherein premises was not only required to be shown in policy's declarations but also was required to be premises 'where you reside,' was an unambiguous statement of coverage requiring insured's residence at premises at time of loss or continuing."

It is obvious that when a separation occurs, there may be implications for insurance coverage. While some insurance adjusters may look the other way and not point out this coverage issue, I have been involved in a number of insurance coverage cases which could have been avoided if the insurance agent was notified and appropriate coverage was obtained following these tragic, but not uncommon, situations.

Tiger Woods and Elin Nordegren may be able to afford any loss because of their enormous wealth; most separated couples can not. A significant property loss can have serious financial implications if not covered and compound an already bad situation. Family law and divorce attorneys have an obligation to raise these insurance consequences to their separated clients because they occur in most marital separations.

The International Risk Management Institute (IRMI) offers a fantastic online resource for insurance information. Many consider it to be superior to the FC&S Bulletins. We subscribe to both, and I used it as a reference for this simple research project.

Regarding the purchase of insurance for pets, the IRMI notes:

Veterinary bills are increasing much faster than the overall rate of inflation. Part of this reason lies in the advancements of medical techniques and the increasing number of veterinarian specialists. These trends, however, come at a price. Performing a magnetic resonance imaging (MRI) exam on the spine of a cat can cost $1,300. Removing a tumor on a dog can cost $3,700, and implanting a pacemaker can cost $5,500. Even dealing with a dislocated ankle can cost upwards of $5,000. As a result, pet insurance sales are increasing rapidly. Should your clients purchase this coverage? If the answer to any of the questions below is yes, they should seriously consider purchasing this coverage.

• Are they willing to go into debt to provide health care for their pet?
• Do they consider the pet an integral member of the family?
• Are they on a fixed or limited income?
• Would they be willing to spend over $4,000 to save the pet in a life-threatening situation?

Finally, if they decide to purchase this protection, they should carefully compare the rates and policy provisions of at least three well-established pet insurers.

Some of my friends have pretty expensive pets. These exotic and expensive pets may need to be insured, wherever they are, under an inland marine form of coverage called a “Live Animal Floater.” I imagine some of the champions at Westminster had this type of coverage. It was humorously described by IRMI as follows:

It is not clear why this class specifies live animals. It would not make sense for individuals and families to insure most dead animals, although some that have been stuffed might qualify as fine arts.

Pets often provide great emotional value, but insurance covers only their financial value. Therefore, it is not common to insure ordinary household pets. However, some live animals owned by individuals or families have exceptional monetary value that makes insurance feasible. These include exotic pets or purebreds with special value as breeders. For these types of animals, pet insurance is available from some specialty insurers.

It should be noted that damages caused by pets are excluded under most forms of policies. These are listed as additional exclusions in the HO 3 standard form:

(6) Any of the following:

(a) Wear and tear, marring, deterioration;

(b) Mechanical breakdown, latent defect, inherent vice, or any quality in property that causes it to damage or destroy itself;

(c) Smog, rust or other corrosion, or dry rot;

(d) Smoke from agricultural smudging or industrial operations;

(e) Discharge, dispersal, seepage, migration, release or escape of pollutants unless the discharge, dispersal, seepage, migration, release or escape is itself caused by a Peril Insured Against named under Coverage C.

Pollutants means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed;

(f) Settling, shrinking, bulging or expansion, including resultant cracking, of bulkheads, pavements, patios, footings, foundations, walls, floors, roofs or ceilings;

(g) Birds, vermin, rodents, or insects; or

(h) Animals owned or kept by an "insured"

 The IRMI had a very interesting discussion about this exclusion and a warning about the ability to collect:

Exclusion (6)(h) removes coverage for any losses due to animals owned or kept by an insured. There are those who would argue that by placing the exclusion of animal damage in this list, the policywriters intended to exclude only long-term damage done by the insured's animals. Those who argue this point would say that the principle of ejusdem generis applies and that all items in the list should be read in the same context, i.e. as damages occurring over a period of time.

To clarify, Black's Law Dictionary (5th ed.), says this about the principle of ejusdem generis: "Where general words follow an enumeration of persons or things, by words of a particular and specific meaning, such general words are to be held as applying only to persons or things of the same general kind or class as those specifically mentioned." In the case of this exclusion, the principle of ejusdem generis should be applied within paragraphs, but not between paragraphs.

The principle of ejusdem generis is properly applied to exclusions (6)(b) and (c) as follows.

(b) Mechanical breakdown [specific item], latent defect [specific item], inherent vice [specific item], or any quality in property that causes it to damage or destroy itself. Note that the fourth item represents a general expansion which would be limited under rule of ejusdem generis to other items like the ones listed in this paragraph (6)(b)(1) only.

(c) Smog [specific item], rust [specific item] or other corrosion. Again, the third item represents a general expansion which would be limited under rule of ejusdem generis to other items like the ones listed in this paragraph only.

Those who argue that the policy excludes only long-term damage by animals also cite the principle of noscitur a sociis. This principle requires a list of items that conceptually belong to the same family. Again, it applies within paragraphs, but not between paragraphs. For example, noscitur a sociis applies to (6)(a) as follows.

(a) Wear and tear, marring, deterioration—so that the term "marring" would be interpreted under the rule of noscitur a sociis in light of the surrounding items to include physical imperfections caused by gradual erosion.

There is no indication that the items listed in the various paragraphs of exclusion 6 were meant to be included in the same conceptual family. "Wear and tear" (6)(a) is a mechanical process and is not part of the same conceptual family as "animals owned or kept" in paragraph (6)(h).

Thus, exclusion (6)(h) should be read as eliminating coverage for all damage done by animals the insured owns or keeps. Such animals would include his or her own pets. The exclusion would also apply if the insured were keeping the neighbor's pet while the neighbor goes on vacation. However, any damage done to the home by a wild animal is covered, but damage done by birds, vermin, or rodents is not, because such losses are specified as not covered in (6)(g).

So, keep your dogs, cats, and other pets loved, happy, trained and, possibly, insured. Somehow, keep them from doing any damage to your home.

Barth is a dynamo and runs the Hospitality Law Conference. He convinced me that I needed to participate, become somewhat of a legal sponsor and speak at the 2010 Conference in Houston. It is a wonderful conference. I highly recommend that general counsel, risk managers, loss prevention managers, franchisees, developers and outside counsel of hotels, resorts, condo hotels, timeshare rentals, restaurants, bars and other businesses that provide a place to eat or stay attend this very specialized legal conference.

Many plan details of their travel agenda and logistics far in advance. Not me. I was surprised when I found out yesterday afternoon that this conference was at the Omni Hotel next to our firm’s Houston office. The professional and friendly Omni Hotel staff has come to know me over the past year, and they were laughing that I was speaking at “their” type of conference.

The insurance considerations that pertain to the hospitality services industry are extraordinarily unique and complicated. The risks and operations of these businesses require study by professionals to appreciate how the insurance should be placed and property insurance claims handled. I can appreciate that many of the lawyers attending this conference devote their entire practice to the myriad of significant legal issues facing the operators and owners of these businesses. I can also appreciate the need for insurance agents and brokers who specialize in only this industry. Without such specialization, insurance brokers and agents would be much more likely to sell insurance coverage with gaps, leaving hospitality policyholders uninsured or underinsured.

My presentation was the “Insurance Litigation Survey.” I presented trends and lessons from recent hospitality property insurance cases. My co-panelist, David Shaneyfelt, taught about third party liability coverage. Just as last week at the Windstorm Conference, we presented practical points from cases rather than explaining legal reasoning. While I could cite from the eight case examples, this post will be a lot more important to most if I provide an outline of the points:

I. Insurance Disputes can be voided if Proper Coverage is Purchased.

A. Get an insurance agent or broker who thoroughly understands the hospitality industry. Most owners are not aware of all the risks facing them and needed coverages to properly insure their business. Most have little knowledge of or appreciation for the impact of exclusions and limitations contained in policies.
B. Develop and demand that the agent thoroughly review your particular business and push your agent to do so with letters and agreements setting forth exactly the type of relationship and service expected, the broadness of coverage desired, and the thoroughness of value investigation needed to be fully and safely insured.
C. Most property underinsured and uninsured situations occur because of:

1. Improper values for replacement/reconstruction.
2. Wrong ownership/title/ipterest on the Policy
3. Not covering all the property—some do not appreciate that many coverage forms exclude certain types of property or limit recovery. Endorsements or separate stand alone policies are often needed to have all the insurable property actually insured.
4. Inclusive coverage of all perils. For example, flood and earthquake are often not covered under a standard form, but may be insured through a difference in conditions policy. Economic loss arising from criminal or fraudulent conduct may have to be insured under various Crime Forms.

II. Trends of Concern Where Coverage and Claims are at Issue:

A. Occupancy and Vacancy clauses must be met or losses otherwise covered may be excluded. See my post FC&S Warns Agents and Policyholders to Watch the Vacancy Exclusionary Clause.
B. Post loss duties have time limits with harsh penalties in some states if not timely met.

1. Provide timely notification of a loss.
2. Proofs of loss time frames should be met or extended in writing.
3. Hire experts to segregate covered amounts from uncovered perils.
4. With any significant loss, consider whether the causation sequence could lead to a possible excluded loss. Hire coverage counsel if the insurer starts investigating anything other than value. Concurrent causation clause interpretations in some states provide insurers an incentive to retain engineers and experts to opine a cause or result of the loss is excluded.

III. Insurers are Starting to Place “Dispute” Clauses into Contracts. Check for:

A. Choice of law agreements.
B. Choice of forum for litigation.
C. Arbitration agreements.
Many of these are invalid under state insurance codes. However, many state insurance code protections do not apply to surplus lines policies. These types of provisions are becoming very common in excess or layered policy formats. Demand that these not exist and list that request to the agent or broker. The law where the property exists is usually the best because that is typically how the property is being underwritten and expected to be adjusted when calculating premium.

IV. Claims Practice Lawsuits are increasingly brought by Commercial Policyholders Following Delay and Partial Denial

A. Insurers increasingly are taking more time and denying parts of claims—even to the largest of clients. My post Large Complex Losses Invariably Suggest that the Policyholder Hire Licensed Professionals shows that even the business insurance media have surveyed support for this claims trend.
B. Document every person, activity, verbal promise, and statement made by the insurance company representative and consultants.
C. Obtain independent valuations promptly.
D. Obtain lines of credit to repair and operate because insurers may be slow to pay partial losses or will hold those to leverage or bargain for agreements lowering benefits otherwise owed.
E. Claims practice actions (wrongly dubbed “bad faith” lawsuits long ago) can often be brought to provide compensation for the various wrongful conduct by claims departments that refuse to do their job in good faith. Extracontractual losses and expenses are often incurred by businesses when the insurance company adjustment performance is delayed and otherwise wrongful.

The only economic incentive most insurers have today to provide a sufficient number of trained and motivated adjusters that will promptly investigate the loss and evaluate the damage so that the policyholder will be promptly paid the full amount of the benefits the insurance product was designed to provide is to have such “bad faith” claims brought and hold insurance companies accountable when they fail to properly perform.

Do not support Chamber of Commerce efforts to repeal laws that provide for such lawsuits because they hurt businesses and support notions that people should not be responsible for the harm they cause when they break rules they promise to perform. What kind of society would we have if rules could be broken and nobody accepted personal responsibility? Insurance industry interests in the Chamber of Commerce are behind some of these recent lobbying efforts, but such efforts are bad for corporate and business policyholders.

The last point I made was highlighted by reported hospitality case decisions. It was supported by the panel presentation that followed me. Further, I had a friend and very able colleague in the audience, Gary Thompson, who represented a large hotel chain at trial last year. The hotel chain won a $24 million verdict after litigating a partially denied claim. This major hotel chain actually did the reconstruction at its own expense and the insurer still would not honor its obligation. There are not many businesses that can go out and finance $24 million worth of construction in today’s business climate. Imagine how much leverage an insurer has to force a wrongfully compromised settlement upon a business when that business was only requesting the benefit it purchased: full and prompt payment for a covered loss. Knowing of that matter, I used his real life situation to demonstrate what is going on in the field during many claims adjustments.

I will write a separate post about the following panel lead by the excellent Arthur J. Gallagher hospitality insurance broker, Wes Brandt. If any insurance adjuster thinks that my rhetoric is pointed about the current condition of commercial claims practices, they should have been in the audience when Brandt and his panel delved into this topic. 

The article correctly noted the generally accepted difference between a structure that is "vacant" and one that is "unoccupied."

“Vacant” or “Unoccupied”?

Courts have long defined “vacant” in insurance policies as meaning empty of inanimate objects — as opposed to “unoccupied,” which they have defined as being void of human habitation. For example, in Myers v. Merrimack Mut. Fire Ins. Co., 788 F.2d 468 (7th Cir. 1986), an apartment building was deemed “vacant” and not merely “unoccupied” in regard to a fire loss. The court found that the loss was excluded where apartments in a building, except for some stoves and refrigerators, were entirely empty for approximately 18 months, lacking both tenants and inanimate objects. (emphasis added)

A very interesting discussion in the article concerned seasonal businesses:

One area that conjures up questions about the meaning of “vacancy” stems from insureds with seasonal businesses. For instance, insureds with motels, restaurants, and shops along the Maine coastline may close their businesses during the off season. Contents, such as equipment, furniture, and other personal property can stay, but all perishables are removed. Properties are winterized by draining pipes and shutting off water and heat.

Carriers know these properties are seasonal and accept the risks. Therefore, in the event of a loss, would these property types be deemed vacant by the policy language on a commercial property policy?

The Insurance Services Office (ISO) CP 00 10, Building and Personal Property Coverage Form states that a building is vacant unless 31 percent of its square footage is used by the building owner to conduct customary operations. As the customary operations of seasonal businesses are to rent rooms and service customers, and those customary operations are not being performed in the months they are closed, the buildings would meet the definition of “vacant” set out in the policy, and those provisions would apply.

I had never thought about that coverage issue as it applies to seasonal businesses. I find unusual but very important topics are routinely discussed in the FC&S and that is why I find the product so important to adjusters and coverage counsel.

The reality is that an earthquake can strike anywhere in the world with potentially devastating effects. Injury and damage in poverty stricken areas like Haiti, with a poor infrastructure, of course will be much greater than in an area where buildings are sturdier and compliant to earth movement safety standards.

But disaster can strike anywhere and at anytime. Despite this reality, only 13-15 percent of California residents carry earthquake insurance on their homes—and it is well known that much of California is prime territory for destruction by earth movement.

Have you reviewed the earth movement insurance that your clients carry recently?

It even offers a white paper regarding the coverage and issues, "After a Quake: Insurance Coverage in Earthquake Disasters." My suggestion is that policyholders discuss the alternative methods for obtaining the coverage with their agents and brokers. Also, consider obtaining a Difference in Conditions form which picks up otherwise excluded coverages. 

Coverage is provided on a storage facility under the CP 10 20 06 95 cause of loss form. Two of the units were rented by an individual who became delinquent, so the insured padlocked the units. After a couple of months, the insured learned the tenant had moved and could not be located. The insured cut off thee locks and entered the units to discover food containers, appliances, and trash abandoned by the tenant. Grease had spilled (or been poured) on the concrete floor. This grease ran into two other units. As this is named peril coverage, we do not believe there is coverage. However, the insured is arguing that the damage is the result of vandalism. The tenant had not been in the units for several months as they had been padlocked and there had been no tampering of the locks prior to entry. There is no way to verify if the tenant poured the grease on the floor, however, there was no other evidence of malicious damage to indicate it was an intentional act. Is the loss excluded?

The answer provided is sound assuming that proof of how the loss occurred cannot be found:

It is our opinion that the insured would have to prove that the loss was intentionally caused, which does not sound like a possibility. Without evidence showing this was an intentional act, it could not be considered a vandalism loss.

The important point has to do with burdens of proof which often become play when the loss is discovered and the cause uncertain. The general rule is that all risk is afforded so long as there is damage within the policy term and the burden is on the insurer to prove that the damage falls within an exclusion. If the coverage is under a named peril basis, the proof of the peril causing the damage is upon the insured.

Regarding exclusions in all risk policies, insurers sometimes wrongly give exclusionary language too broad an interpretation. In an excellent post on the Tennessee Insurance Litigation Blog, Rules of Interpretation for Insurance Policies, Brandon McWherter noted:

Exclusionary clauses are to be strictly construed against the insurer when drafted by the insurer. Palmer v. State Farm Mut. Auto. Ins. Co., 614 S.W.2d 788, 789 (Tenn. 1981).
...

In Tennessee, exceptions, exclusions, and limitations in insurance policies must be construed against the insurance company and in favor of the insured. Allstate Ins. Co. v. Watts, 811 S.W.2d 883, 886 (Tenn. 1991). The entire policy, however, including insuring clauses and exceptions thereto, must be read as a whole. Am. Sav. & Loan Ass'n v. Lawyers Title Ins. Corp., 793 F.2d 780, 782 (6th Cir. 1986). Further, exceptions should not be construed so narrowly as to defeat their evident purpose. Standard Fire Ins. Co. v. Chester-O'Donley & Assocs., Inc., 972 S.W.2d 1, 8 (Tenn. Ct. App. 1998).

In Ensuing or Resulting Loss, and the Burden of Proving Causation Explained Simply, I quoted a speaker who provided a fairly simple rule for the factual and legal burden of the policyholder in a typical all risk situation:

An insured seeking to recover under an "all risks" insurance policy merely has the burden of proving only that direct physical loss or damage occurred to covered property while the policy was in force. Once the insured establishes a loss apparently within the terms of an "all risks" policy, the burden shifts to the insurer to prove that the loss arose from a cause which is excluded. The insured is not required to disprove any excluded cause of loss.
...

Exclusion clauses are generally considered contrary to the fundamental protective purpose of insurance. Thus, the courts give a strict interpretation to exclusion clauses, as opposed to the liberal interpretation afforded coverage protections.

For all my Texas friends that are crying their eyes out after losing to Alabama in the BCS Championship, I would like to warn that Texas has a slightly different view of burdens of proof even in an all risk situation, as I noted in, Causation Issues to Note in Texas Property Insurance Coverage Disputes-Part II.

This week, Miller testified before the National Association of Insurance Commissioners that damages caused by Chinese drywall are covered under first party property insurance policies. Dan Luby of the Florida Insurance News forwarded an article, Lawyer Sees Insurer Vulnerability To Drywall Claims, that indicated:

Charles Miller, of the Insurance Law Center in Berkeley, Calif., made his remarks here at a hearing on drywall issues by the National Association of Insurance Commissioners Catastrophe Insurance Working Group at the NAIC’s Winter National Meeting.

Mr. Miller drew upon language contained within Fire, Casualty & Surety (FC&S) bulletins, a publication within National Underwriters parent Summit Business Media, to raise questions about whether exclusions apply.

If you want to read the FC&S Bulletin Miller is referring to, I wrote about it in a prior post, Chinese Drywall Losses Covered Under First Party Property Insurance Policy.

The article also noted:

Mr. Miller said FC&S - resource for insurers for interpretation of both commercial and personal lines coverages - notes that many courts have found the pollution exclusion in homeowners policies only applies to “traditional environmental damage.”

Mr. Miller said, “The release of gases inside of a residence is not normally considered to be traditional environmental damage.

Regarding latent defect and inherent vice exclusions some insurers have cited, Mr. Miller noted the FC&S bulletin states the exclusion applies to “a loss due to any quality in the property that causes the property to damage or destroy itself that results from something in the property itself.”

The drywall, he noted, is not destroying itself, but rather causing ensuing damage to its surroundings, which should be covered.

Mr. Miller said regulators should look to protect consumers by conducting multistate market conduct exams to ensure proper investigations into Chinese drywall are being conducted. Mr. Miller said there is a “critically important relationship between a timely and thorough investigation and a proper evaluation of the coverages.”

Amy Bach of United Policyholders was at the same lecture concerning Chinese drywall coverage issues that I wrote about earlier this week in Ensuing or Resulting Loss, and the Burden of Proving Causation Explained Simply. I talked briefly with Amy about my concerns over the coverage analysis and whether courts would misconstrue "ensuing loss" language.

Amy Bach also testified and was quoted with a rather unique suggestion for helping out policyholders with coverage issues:

"Ms. Bach indicated that insurers should assist policyholders and cover their claims now, and if they are found not liable later, they could then subrogate against those entities."

I personally do not know any first party insurer that has afforded any coverage for Chinese drywall losses. I seriously doubt they would do so because insurance companies love to hold money. Further, if there truly is no coverage, they may lose their subrogation rights as a volunteer rather than a party obligated to pay a debt.

One trend seems to be more coverage gurus stating that coverage exists to some extent for first party Chinese drywall claims. As a result, more claims are going to be made. We will see how they play out after denial and litigation ensues.

I felt his discussion of the commercial and homeowners policy forms was excellent. The points he made regarding the science of drywall, covered risks, ensuing or resulting damage, causation, and exclusions were clear and simple and should be replicated by other attorneys.

The one problem and question raised by those in attendance was the conclusion:

"Is there really coverage--what is the covered cause of loss that is not excluded or is an exception to an exclusion?"

I remind everyone that the FC&S Bulletin has concluded that there is coverage for Chinese drywall under the first party policy, as I noted in FC&S Says Ensuing Loss Coverage Applies to Chinese Drywall Claims. I will post more on Ed's lecture and this topic later tonight. Regardless of the conclusion, the analysis up to that point was an excellent lecture. It made the cost of the conference worth the investment.

The PowerPoint presentation from the lecture is available here.

A New York subscriber to the FC&S Bulletins asked:

One of our insureds owns a building that was destroyed by fire. Instead of rebuilding it in the exact same location, the owner wants to move it to another part of the shopping center in which it was located.

The insurance is written on a replacement cost basis on commercial property form, CP 00 10 06 95. This form states that the insurer will pay the lesser of the limit of insurance, the cost to replace the structure on the same premises, or the amount actually spent to repair or replace the property.
Does this mean that the insured must rebuild on the same site in order to receive a replacement cost adjustment?

One of the benefits to subscribing to the FC&S Bulletins is the ability to ask such questions to the editors. As many that read my Blog, I am a big fan of the FC&S and endorse its product without any benefit to myself.

The Answer:

Your insured may rebuild the structure at another location, but the amount paid to do so will be no more than the cost to rebuild it at its original premises. In other words, it may cost $500,000 to rebuild the store at its present location, the policy limit may be $550,000, and the cost to rebuild it at the new location may be $525,000.

The insured will receive no more than the $500,000 that it would cost to rebuild it at the original location. In addition, if it would cost only $475,000 to build at the new site, the insured would receive only the $475,000—the amount actually spent to repair or replace the lost or damaged property.

It is interesting to note that the 2000 edition of the commercial property form CP 00 10 06 95 has dropped the wording referencing the "same premises.

A Florida case came to the same conclusion citing decisions from New York, California, and Washington. In Davis vs. Allstate Insurance Company, 781 So.2d 1143 (Fla. 3d DCA 2001) the Court held:

“[ R]eplacement cost under the ‘Guaranteed Replacement Coverage’ provision is measured by what it would cost to replace the damaged structure on the same premises.” Kumar v. Travelers Ins. Co., 211 A.D.2d 128, 627 N.Y.S.2d 185, 187 (1995). “[W]hen the insured desires to rebuild either a different structure or on different premises ... the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises.” Conway v. Farmers Home Mut. Ins. Co., 26 Cal.App.4th 1185, 31 Cal.Rptr.2d 883, 885 (1994). “Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds.” Hess v. North Pacific Ins. Co., 122 Wash.2d 180, 859 P.2d 586, 588 (1993).

We agree with the courts in Kumar, Conway, and Hess, supra. The amount owed by the insurance company toward the purchase of a different home is measured by the amount necessary to repair damage to the insured property or to replace items that cannot be repaired. The insured should pay for any costs in excess of that amount.

The ability to purchase or repair at a different location is extremely important to many policyholders. This is one reason why adjusters must fully inform policyholders of this option. For obvious reasons, many restoration companies would rather the policyholder not know of this option.

The Complaint alleged in part:

1.  The State of Minnesota, by its Attorney General, Make Hatch, brings this consumer protection lawsuit for declaratory and injunctive relief, restitution, civil penalties, costs and reasonable attorney fees. Defendant American Family Mutual Insurance Company, in advertising and selling its homeowners insurance policies to Minnesota consumers, represents that it will provide full insurance coverage to consumers in the event that their homes are damaged by accidental perils, including windstorm and hail. Contrary to such representations and the reasonable expectations of consumers, defendant has repeatedly failed to provide full replacement coverage to insured consumers whose homes are damaged by storms. Instead defendant reimburses such consumers only for work necessary to replace the portion of the consumer's home (for example, one wall of siding) that defendant maintains was directly damaged. Defendant;s practice forces many consumers to choose between having a home with mismatched siding of roofing or reaching into their own pockets to pay for the matched siding or roofing that was on their homes before the storm damages occurred.

The Order set out the relevant policy language:

5.  American Family's homeowners' policies provide for full replacement costs, without deduction for depreciation, and insure the policyholder's dwelling for all loss or damage unless the loss is excluded in the policy. Under the "Replacement Cost" section of American Family's policies, American Family undertakes the following obligation:

[W]e will pay the full cost to repair or replace the damaged building without deducting for depreciation, but not exceeding the smallest of...ii. the cost to replace the damaged building with like construction for similar use on the same premises; or iii. the amount actually and necessarily spent for repair or replacement of the damaged building.

Our Settlement Option. In the event of a covered loss, we have the option to: a. make a cash settlement for all or part of the damaged, destroyed or stolen property; or b) pay the cost to repair, rebuild or replace all or the necessary part(s) of the damaged, destroyed or stolen property with like property, as of the time of loss, less an allowance for depreciation when replacement cost coverage doesn't apply.

The Court then set out the facts which are virtually the same as in all matching cases:

7.  After the storm damage occurred in 1998, in many instances, materials of like kind and quality necessary to repair damages to the siding or roofing existing on consumers' homes were no longer manufactured or were otherwise unavailable; consequently, materials reasonably matching those on consumers' homes were not available. As a result, consumers have had to incur substantial out-of-pocket costs in order to obtain matching materials or live in mismatched homes.

The Court also noted that the insurer never gave the consumer the impression, in any other advertising or dealings with the consumer, that a matching structure would not be paid for:

9.  Nothing in American Family's policies limits the insurer's obligation, excludes coverage or otherwise supports American Family's practice of limiting payment under replacement value provisions of its policies to sums necessary to replace only the portion of the policyholder's dwelling that is directly damaged by a covered peril, including a hail or wind storm, where replacement materials that reasonably match (i.e., that are, under the policies' language, "of like construction for similar use" to) the existing materials on the dwelling are no longer manufactured or are otherwise not available.

10.  In advertising and selling its homeowners' insurance policies, American Family has not affirmatively disclosed or informed consumers of the material fact that Defendant, as a matter of practice, limits the amount it pays for storm damages to the cost of replacing only those portions of the consumer's home that American Family maintains are directly damaged even if its failure to do so would result in a mismatch.

11. Defendant does not disclose or inform consumers, prior to their purchase of homeowners' insurance policies from Defendant or at any time prior to the consumer's filing of a claim, that Defendant limits the amount that it pays for storm damages to the cost of replacing only those portions of the consumer's home that Defendant maintains are directly damaged, even if repairs result in a mismatch.

12.  As a matter of practice and policy, American Family routinely settles claims under its automobile insurance policies and Minnesota law with parts of "like kind and quality" that match or are painted to match the undamaged parts of the vehicle. At oral argument, American Family explained this discrepancy in its interpretation of "like kind and quality" between its homeowners and automobile insurance as one strictly of cost.

The Court's ruling is significant and should provide some guidance to others with these situations:

2.  In construing and interpreting the text of an insurance policy, the Court must consider the interaction of the policy clauses, the insured causes of loss and any limitations or exclusions on the insurer's liability for the consequences of an otherwise insured event. Witcher Construction Company v. St. Paul Fire & Insurance Co., 550 NW2d 1 (Minn. App. 1996), rev. denied (Minn. 1966). Pursuant to American Family's policies, hail damage to a dwelling is a covered loss with the amount of monetary loss subject to the limitations as set out in the replacement value provisions and the exclusions contained within the different policies.

3.  A court is not to read an ambiguity into the plain language of a policy to ensure coverage. Farkas v. Hartford Acc. & Indem., 173 NW2d 21, 24 (Minn.). Instead, the Court must give the terms in a policy their plain, ordinary and popular meaning, Columbia Heights Motors v. Allstate Insurance, 275 NW 2d 32, 34 (Minn. 1979) and construe the policy terms in conformance with applicable statutes. When policy language is ambiguous or confusing, it is public policy in Minnesota to extend coverage, rather than restrict it. Hennen v. St. Paul Mercury Insurance, 312 Minn. 131, 136, 250 NW2d 840, 844 (1977). The language in the Defendant's policy regarding replacement value for the repair of covered damages is not ambiguous and not subject to more than one interpretation. Estes v. State Farm & Casualty Co., 358 NW2d 123, 124 (Minn. App. 1984); Columbia Heights Motors v. Allstate Insurance, 275 NW2d 32 (Minn. 1979). In this case, any confusion as to the amount of a covered loss has resulted from Defendant's argument that their obligations under their policy provisions are met by only paying for new materials to replace the damaged areas of the home, without regard as to whether the new materials match in color, quality, texture or material the original siding or roofing on the home "at the time of the loss." At oral argument, Defendant conceded that pursuant to the same statutory language of "like kind and quality", Defendant repairs damaged automobiles with matching parts, both physically and "cosmetically." Defendant points out that the difference in their interpretation of their obligations under these two subdivisions of Minn. Stat. 72A.201 is based on the greater cost to Defendant to achieve a "matching" result on a damaged home. Compare Minn. Stat. 72A.201, Subd. 6 (2) and 72A.201 Subd. 5 (8).

4.  Generally, given the discrepancy in the bargaining positions of the insured and insurer, when the meaning of insurance policy language is in dispute, the matter is to be resolved in favor of the insured. State Farm Insurance v. Seefeld, 481 NW2d 62 (Minn. 1992). Here, Defendant was in a position to add an exclusion or limitation in its replacement coverage under its homeowners' policies for what should be the common and easily anticipated event that matching housing materials would no longer be available for repairs over the entire useful life of a dwelling. Defendant's policies contain no such exclusion or limitation. Further, the greater cost to Defendant to achieve a matching result on a home versus an automobile is not justification to interpret identical language in Minn. Stat. 72A.201 differently.

I came across this ruling in the FC&S Bulletins, where it was mentioned briefly. I thank our Knowledge Manager, Attorney Ruck DeMinico, for tracking down the state docket and obtaining the decision after having it copied from the Court archives. My understanding is that Lexis will now make it available as a published opinion. It is a significant decision, and I encourage other Departments of Insurance to take note of the need to prevent this practice by insurers-- it happens frequently.

Click here to read the entire Complaint.

Click here to read the entire Order.

My suggestions and impressions are supported by the editors of the FC&S Bulletins. The following is what they noted regarding the need to need for agents to implore their clients to schedule valuable property:

Homeowners forms commonly limit amounts paid for loss to certain classes of property. For example, the 1991 Insurance Services Office (ISO) form HO 00 03 limits are: money, coins, gold and silver, $200; securities, $1,500; watercraft, $1,500; trailers, $1,500; theft of jewelry and furs, $1,500; theft of guns, $2,500; theft of silverware, $2,500; business property on the residence premises, $2,500; business property off the residence premises, $500; and certain electronic devices, $1,500.
…
When discussing homeowners insurance with a client, the agent should make sure that the client understands there is often a need to increase the coverage for these classes of property, either by endorsement to the homeowners policy or by separate insurance…

Other areas to be explored for possible coverage needs include the client’s outside interests and hobbies. Photography, sports, collecting antiques or memorabilia may call for additional insurance. Emphasize to the client that although these particular items are not limited by dollar amount in the basic policy, there may not be enough insurance to cover all of them plus the other unscheduled personal property in the home in case of a large or total loss. Think, for example, of a $50,000 grand piano. If the insured has a $200,000 home, with 50% (or $100,000) for personal property, in event of a total loss that leaves, after replacing the piano, only $50,000 to replace an entire household’s contents.

Also, many of these items—because of their portable nature and use in many places—are subject to losses not covered by the homeowners forms. A strong selling point for the agent is the “open perils” coverage provided by scheduling. For example, the insured may carry an expensive camera on a trip. While photographing the Grand Canyon, she drops it over the edge of the canyon and breaks it. There is no named peril that provides coverage. Also, neither the ISO schedule HO 04 61 10 00 nor the AAIS schedule ML-61 exclude loss by flood or earthquake, as do the underlying homeowners policies.

I discussed this last year in Insuring Valuables And Collectibles and stated:

Most standard homeowners policies do not pay loss of market value for these items and have significant dollar limitations on recovery. Most collector's insurance policies pay the reduction and loss of market value when a loss occurs. Further, the deductibles are generally less and, unlike most homeowner policies, the perils of flood, earthquake, accidental breakage, and expanded water loss are generally covered.

If you do not want to be underinsured and you are fortunate enough to have items of financial value, do yourself a favor and buy collector's coverage. The peace of mind that comes when insuring these items cannot be overstated.

I once had a client who lost a valuable collection. He told me that the money he received from his collector's insurance policy allowed him to go back and enjoy the process of accumulating items for his collection. His passion for what he truly enjoyed was restored. As is often the case in life, wanting and obtaining is often far more pleasurable than the having.

In Some Thoughts and a Story Regarding Insurance Fraud I also provided some advice regarding how to make certain valuables are adequately covered:

Collectors should always get an independent appraisal and expertization before purchasing from a dealer or at auction. Some dealers and auctioneers advertise and promote items which are not authentic, damaged or altered. Dealers often make expert repairs which are difficult to detect and make the item appear pristine. Such alterations subtract significantly from value. Items sold on eBay are notorious for this.

So always follow this rule:

When buying something of value, get the expertization from a true expert not affiliated with the dealer or seller.

The additional jewelry coverage for perils on an open basis is quite significant. It is not just that the values are limited under the standard forms. The risks are limited. FC&S had this remark regarding this issue:

Sublimits on certain classes of expensive personal property in the homeowners exist because the policy is written and priced for the “average” exposure. Anyone who has items in excess of the limits in the policy is deemed to present a risk greater than the “average.” Because of the susceptibility to theft and “mysterious disappearance,” the premium to insure jewelry in particular can be substantial, which may give some insureds second thoughts about scheduling. However, there are definite benefits in scheduling the property. First, as stated above, scheduling provides open perils coverage.

Coverage for personal property on the homeowners is on a named perils basis, so a woman whose toddler throws her diamond engagement ring down the garbage disposal would find no coverage under her homeowners policy. The only excluded causes of loss that apply to scheduled jewelry are wear and tear, gradual deterioration or inherent vice, insects or vermin, war, or nuclear hazard. Gold, for example, will wear away after a time (as when a gold ring is worn for a long period of time), but for the most the coverage is broad enough to allow for virtually all that may befall jewelry. By scheduling, jewelry is even covered for loss resulting from flood or earthquake.

Scheduling jewelry also provides some coverage for newly acquired jewelry if jewelry is already insured—the lesser of 25% of the amount of insurance for that class, or $10,000. The insured must advise the company within 30 days of any acquisitions, and pay any additional premium from the date of acquisition. This coverage does not extend past the policy period.

The lesson is quite clear:

Policyholders should schedule jewelry and other collectables on a separate coverage form that fully protects those expensive, and sometimes priceless, articles. Insurance agents and brokers should inquire about the need and place this coverage as a matter of practice.