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

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.