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

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

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

Direct Physical Loss and Cosmetic Loss

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

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

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

ANSWER

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

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

The problem is that the property insurance policy covers loss caused by physical damage. To receive benefits, you normally have to have “physical damage” to something caused by a peril that is covered under the policy. Virtually all modern forms say something to the effect that the coverage is for “direct physical loss or damage to covered property…..caused by or resulting from a Covered Cause of loss.” If you can show that there has been physical loss or damage caused by an insured peril, the warranty value is a consideration for the amount of the loss. Without actual damage, however, you cannot make a claim for the contractual loss because property insurance policies require physical damage.

The FC&S Bulletin has two question and answers about this issue regarding warranties which are very instructive. The first is on point with the questions posed to me:

Warranty Cancelled—Direct Physical Loss?

Our client has a CP 00 10 04 02 covering their leased telephone system. The system, consisting of several components located throughout the building, was only thirty days old when it suffered water damage from a frozen overhead water pipe.

The lessor insists that any component exposed to water be replaced, whether it suffered obvious damage or not. The lessor will not honor the warranty/service agreement for any components exposed to water but not replaced. Likewise, the lessor will not honor the agreement for components which are repaired, rather than replaced.

The insurer says that they are only obligated to pay for components which suffered obvious damage. They will not replace equipment simply because it was exposed to water. Similarly, they refuse to replace components where repairs cost less than replacement. According to the insurance company, the loss of the warranty/service agreement is not "direct physical loss or damage" and is not covered under the policy.

We don't believe the insured is made whole if they lose the warranty/service agreement on their equipment. Whether the insurance company pays to replace the equipment, or pays the value of the warranty (which would be difficult to determine), it seems clear to us that they must recognize the value of the warranty in the claim settlement.
…

Answer

In your insured's case, there is some question whether the telephone components are damaged. The policy covers "direct damage" to property. If that direct damage can be proved, and if the warranty is lost because the manufacturer will not honor the warranty on repaired equipment, then the value of the warranty can be said to be part of the loss. If there is no direct damage to the components exposed to water but not obviously damaged, then there is no coverage. The argument here seems to be with the lessor, and whether it is acting within its rights in voiding a warranty on exposed, but undamaged property.

The insured is caught between two contracts and interests. His "deal" with the insurance company does not mesh with his deal with the telephone equipment manufacturer. We do not know of any insurer will[ing] to replace property only when it might have been damaged and then forego the insurer's option of making repairs rather than replacing.

The editors of the FC&S Bulletin are right. I will research the issue of direct physical loss for examples and post those at another time.

The second question and answer also demonstrates how warranties can be used to increase claim value when physical loss occurs:

Businessowners — Value of a Warranty Included in Replacement Cost?

My client is insured under a businessowners policy, form BP 00 02 12 99. Her laptop computer was damaged, and the loss was covered by the BOP policy. I think the value of the warranty on the damaged laptop should be included in the settlement, but the insurance company adjuster disagrees.

Should the value of the warranty be included or not?

Answer

The value of a warranty should be included in the replacement cost valuation of a damaged object. Insurance policies are contracts of indemnification. As such, the policyholder should be placed in the same condition after the loss as before the loss. The adjuster may want to pro-rate the value of the warranty, but it should be considered.

As I indicated on Friday, everybody doing this for a living should subscribe to the FC&S Bulletins. It is an excellent general first source for questions about coverage and forms to which I routinely refer for my coverage considerations. In my opinion, the on-line edition is much easier to research than the paper edition, which would take hours looking for the proverbial “needle in the haystack.” Still, I learned a lot of coverage issues and answers I would otherwise miss today by reading for irrelevant coverage discussions when researching through the old paper edition.

If you feel you cannot afford a subscription to FC&S Bulletin, you should at least subscribe to their free e-Alert, a monthly online e-newsletter.

A quick search of the FC&S database had the following topic:

Student Away at College—Homeowners Coverage for Personal Property?

See how easy research can be when you invest in specific products that reflect your interests? I get paid nothing from the National Underwriter to promote this product. The bottom line is that if you are in the business of property insurance in any capacity, this product is a must read.

Here is the question and answer:

Several of our clients have sons and daughters attending college away from home. In some cases, they attend college locally, but choose to live at the dorm. We thought they had full coverage for their property under their parents' homeowners policies so long as they maintained their primary residence with their parents.

Now we have been advised that there are several restrictions, one of which is that, if the students are over 21, there is no coverage at all. Could you provide some insight?

Answer

The ISO homeowners forms include limitations for personal property away from the residence premises. First, for personal property "usually located" at an insured's residence other than the "residence premises," there is the limitation of 10 percent of the coverage C amount, or $1,000, whichever is greater.

For many students, the school year's length means that their property is "usually located" at another residence. Although the dorm or apartment is not their permanent residence, it is, nonetheless, a "residence." Webster's Collegiate Dictionary offers this definition of "residence": "...the act or fact of living or regularly staying at or in some place for the discharge of a duty or the enjoyment of a benefit." Therefore, the student's property is covered, but the coverage C limitation applies.

There is another limitation of coverage under the peril of "theft." The policy states that this peril does not include loss caused by theft unless the student who is an "insured" has been at the "residence away from home" at any time during the 45 days immediately before the loss. So, for example, if the student came home for the summer and left personal property in his dorm room, there could be a potential gap in coverage, unless he returned to the dorm room at some time within the 45 days preceding a theft loss.

The only requirement the policy makes regarding age of an insured is that, to be considered an "insured," the person must be a relative residing in the named insured's household, or any other person under the age of 21 in the care of a resident relative or the named insured.

The only problem is that many of the policies sold are not ISO form policies. A number of articles I found on this topic strongly suggested that parents with children away at college call their agents. Indeed, the National Association of Insurance Commissioners repeated this advice:

Check to see if your homeowners policy includes identity theft insurance, and ask your insurance agent if this extends to your student living away from the your primary residence. If not, you might be able to purchase a stand-alone policy from another insurer, bank or credit card company. If your student is renting an apartment, ask if their renter's insurance covers identity theft, or if it could be added to the policy.

I also ran across a related matter involving theft of personal property away from the residence premises. Many people do not realize that most homeowner policies cover personal property anywhere in the world with few imitations. One of the possible limitations came up in another FC&S discussion with the question asked being:

I have an insured with a standard homeowners policy. He has a fishing boat insured on the policy. One day he took the boat to a fish farm (a limited liability company in which he has an interest). While there, some personal property—fishing rods, tackle boxes and the like—was stolen. When I turned the claim in, the adjuster said that the named peril of "theft" for personal property did not apply, since it was stolen from a secondary residence that should have been scheduled on the homeowners policy.

We argued that it was a farm, but the adjuster was adamant in that it should have been scheduled. May we have your thoughts?

The answer by the editors was excellent and on point as usual:

The policy is quite clear in that the theft peril does not apply to personal property stolen at any other residence owned by, occupied by, or rented to an insured. A residence, according to Webster's Collegiate Dictionary, is "the place where one actually lives as distinguished from one's domicile or a place of temporary sojourn," and "the act or fact of dwelling in a place for some time." So, if the insured does not actually reside at any time at the farm it is not a residence, and therefore the loss is covered. The adjuster may be thinking that, if there is a dwelling on the property that makes it a residence, but that is not the case. It must be the insured's residence—that is, where he lives—for the exclusion to apply.

As for scheduling the farm on the homeowners policy, that is an underwriting decision.

College is a unique experience. I am certain that I will not be thinking of the subtle aspects of property insurance coverage when saying my good-bye to Chase. But if some bizarre manner of destruction that frequents the lives of humans under the age of twenty-one mysteriously occurs, I will at least know the property is covered. Whether the all-risk exclusionary scriveners crafted a clause to exclude such an extraordinary event is another story.

My first thought is that readers to my blog with questions should do a “keyword” search. If you were to put “matching” into the keyword search form, a number of posts would come up on the topic. One post, Provide the Right Proof so Your Insurer Will Pay Costs to Repair or Replace to Match Texture, Color and Likeness, had particular application to the question with cases—public adjusters should not be arguing case law because it is practicing law. Another post, Texas Hold 'Em": Merlin Law Group's Seminar for Texas Public Insurance Adjusters, indicated that we covered this topic at a previous seminar. Nobody falls asleep at my seminar, so the person writing the comment must not have been there.

Since this is a frequent question and Texas insurance adjusters seem to have a “we just aren’t gonna pay for matching” attitude, I will address in detail what you can do about it at the Hurricane Ike-What a Difference A Year Makes? Seminar on September 11 for public insurance adjusters.

For what it is worth, the FC&S Bulletins also noted that the topic of “matching” is a frequent coverage dispute. A question was posed to their editorial board:

I have an insured with a homeowners (3) policy who had a wind loss that took a few strips of aluminum siding off the front of his house and few from the back side of the chimney. The siding can not be matched color or grain and the carriers solution is to take a few strips off one of the lower sides of the house put those in where the damage is, where it will not be so noticeable and put the new ones back on the lower sides. What thoughts do you have on this claim?

The answer may be helpful to many with these issues:

The solution offered by the insurer is not in keeping with the HO 00 03 (such as the standard ISO form), which promises to pay "replacement cost of that part of the building damaged with material of like kind and quality and for like use; or the necessary amount actually spent to repair or replace the damaged building." By putting on old siding to replace old siding, the insurer is effectively providing an "actual cash value" settlement, which allows depreciation.

But that is not what the insured has been paying for. The replacement cost policies have traditionally been sold to give "new for old." Yes, this violates the principle of indemnification, but that is how the policies are marketed and that is what the insured pays additional premium for.

So, in this case, the insured had matching siding prior to the loss, and is entitled to new matching siding following the loss.

I am going to have a lot more about this at the seminar, and do not ask for the materials if you cannot go. Just be there.

For policyholders that read this, I hope it is useful. You should also get the feeling that only attorneys and public adjusters that subscribe to the on-line edition of the FC&S should represent you. Those people will go the extra mile for you because they know the value of investment in knowledge regarding a very specialized area of insurance.

For insurance company claims managers and their attorneys reading this, pay my clients while you have the chance!

One section I routinely read from the FC&S Bulletins are the Question and Answers posed to the editors from subscribers regarding loss situations with coverage questions. Two recent discussion regarding the “acts or decisions” and “governmental authority” exclusionary clauses help show how the anti-concurrent language should not be so broadly read in conjunction with other exclusions to prevent coverage.

The first question involved:

…the commercial property policy's exclusion 3.b., wherein losses "caused by or resulting from acts or decisions, including the failure to act or decide" are not covered.

The insurer is denying coverage for damage caused to an insured's apartment building when police forced entry into the building to apprehend a suspected criminal, causing some $5,000 damage to the structure.

We referred the insurer to the Q&A regarding seizure of property by governmental authority (see Coverage Applies to Property Damaged by Police Chasing Fugitive), at which time the company responded that exclusion 3.b. applies and no coverage would be afforded.

It occurs to us that this exclusion is being misused to reject coverage in this case, notwithstanding the "concurrent causation" issues.

The answer was quite to the point and demonstrated how important the lead in language is to a proper reading of most anti-concurrent clause situations:

…exclusion 3.b. is one of the concurrent causation exclusions. These exclusions are meant to avoid coverage when a previously unexcluded cause of loss (a bad decision) joins with an excluded cause of loss (flood) and the claimant is able to make the argument that it was the unexcluded (and therefore covered) cause of loss that led to the damage. Claimants did successfully make the argument in court that it was actually the negligence (a then unexcluded cause of loss) of the water authority in not opening a dam early enough that caused damage to insured property, and not the resulting flood (an excluded cause of loss). It was results such as this that prompted additions of the "concurrent causation" language.

The above would be an example of the acts or decisions exclusion at work. However, as is plainly clear from the lead-in language to the concurrent causation exclusions, if an excluded cause of loss (such as an act or decision) results in a covered cause of loss (which your insured's damage otherwise would be under the special causes of loss form) then coverage applies. Since there is no exclusion otherwise applicable, coverage is available in this situation. (emphasis added)

The governmental authority clause referred to in the question posed the following:

The insured is a health clinic covered under the commercial property open perils form. Recently, a man who was trying to evade capture by the police ran into the clinic and proceeded to take hostages. Eventually, he was forced to surrender by the police who used tear gas and gunfire. In the process of capturing the fugitive, damage was done to both the building and personal property of the health clinic.
The insurance company is denying coverage under exclusion B.1.c. of the CP 10 30 04 02 form. This exclusion avoids coverage for loss or damage caused directly or indirectly by "seizure or destruction of property by order of governmental authority….

The answer by the editors again indicated that exclusionary language should not be so over-broadly interpreted to avoid indemnity for the loss:

The exclusion of loss caused by order of governmental authority is not so broad as to exclude this type of loss. The aim is to exclude coverage for the intentional destruction of property by governmental authority because of some hazard that the property presents, such as when the government orders the destruction of vegetables that are infected with the Mediterranean fruit fly.
In the case you present, the destruction done by the police was incidental to the capture of the fugitive. Bullets that damaged equipment were intended to control the fugitive—they were not fired because the equipment posed any danger to people or property. One would not expect the police officer in charge to state that he or she ordered the destruction of property. For these reasons, the insured has coverage under the policy. A New Jersey court has held, however, that damage done to an apartment by the police in conducting a search warrant was properly excluded under the governmental authority exclusion.

Perhaps, if the New Jersey policyholder had done some homework and selected a policyholder counsel that invested in such resources as those published by the FC&S, the case might have been won.

In other portions of his comment, he implied that the exclusions in property insurance policies are basically the same, and only companies charging much more than State Farm can provide better coverage. He also implies that the policyholders should not rely on advertisements--only the policy language, when deciding what insurance company to purchase insurance from. At least, this is my interpretation of his comment:

"That tired old line you use about the "fine print" of a policy is not even true--there is no "fine print" in an insurance policy, as you well know. The insurance regulators make sure of that...

By the way, the exclusion in the California case you reference has been around for about 75 years...It is not a part of some new conspiratorial plot to sneak in language to exclude losses which were previously covered. There is nothing vague or ambiguous...as the court noted in its opinion. How could it be more clear? Your call for insurance companies to "advertise their exclusions" or "warn" prospective insureds that there are actually things in their policy which are not covered is the classic "not my fault" excuse whenever somebody is surprised ...that a loss... is not covered.

How about the notion of actually reading the policy before you buy it? How about the idea that people should take responsibility for their own failure to read over their policy to find out what is covered and what is not? You made no mention of that in your post.

... blaming the insurance company when something which is clearly excluded and properly denied--and upheld by a court--is just wrong. All Risk is not "All Loss", as the courts have often noted.

...there are policies which provide more coverage than others. ...They are usually far more expensive for reasons which are self-evident..."

Let's review Burnette's assertion that the water leak exclusion is common and has been in policies for 75 years. While the all-risk policy for homeowners coverage was first developed in the 1940's, State Farm writes it own policy rather than use the Insurance Services Office (ISO) common form policy that many insurers, especially the smaller ones, use. Would the common form policy, used by many small independent companies, provide more coverage than the State Farm policy for that water leak?

The Fire, Casualty, and Surety (FC&S) publication of the National Underwriter certainly thinks so. In its May 2003 Question and Answer, an agent selling a standard form policy asked:

"Leaking Pipe and Wet Rot"

Unknown to him, our HO 00 03 ...insured had a pipe leaking inside his kitchen wall for some time. Neither we nor our client knows exactly how long. That leak resulted in water damage to the interior of the walls and hidden damage to the cabinets. It also resulted in wet rot that was hidden within the walls . The insurer is denying all coverage because the loss occurred over a period of time. They are saying that it was not sudden and accidental. We don’t agree and would like your opinion."

The question was submitted by an agent from Indiana. Before giving the answer, I suggest that every adjuster, public adjuster, agent, risk manager and attorney subscribe to this publication. It will make you better at understanding coverage and how insurance policies are supposed to work. If you are a policyholder thinking of hiring an insurance professional, hire one that reads this publication.

This was the answer; it proves that other common insurers write standard policies that do no not include the draconian exclusionary language State Farm happily sells:

"The HO 00 03 excludes loss caused by wet rot. The exclusion reads as follows:

“We do not insure, however, for loss:

2. Caused by:

e. Any of the following:

(1) Wear and tear, marring, deterioration;(2) Inherent vice, latent defect, mechanical breakdown;(3) Smog, rust or other corrosion, mold, wet or dry rot,...”

By placing wet rot in this longer list of things that occur over a long period of time, it is clear that the policywriters’ intent was to exclude wet rot that happens over a long period of time—like on the underside of wooden steps leading down into a damp basement. In that case there has been no intervening peril—the wet rot just happened. And that’s what is meant to be excluded.

It is important not to confuse resulting wet rot damage with loss caused by wet rot. When a pipe breaks, gets the covered property wet, and wet rot then occurs, we have resulting wet rot damage, which is covered, because the peril that caused it is plumbing discharge. The HO 00 03 does not contain the exclusion for “repeated seepage or leakage,” nor does it state that a loss must be “sudden and accidental.”

In this case, the water damage, the wet rot damage, and the cost to tear out and replace the pipe are all covered. We should add, though, that had the insured seen signs of the leak—stained wallpaper, for example—and done nothing, the loss would not have been covered by virtue of the duty of the insured at the time of loss to protect the property and prevent further loss."

Burnette argues that policyholders should be able to pre-determine this result by by reading the exclusionary language before purchasing the State Farm policy. He suggests customers compare and comprehend the legal significance of each word, line by line, to determine their consequences and how they apply in a situation that has yet to occur.

I understand that Burnette has such a view because of what he does for a living-- advocating for insurers that coverage does not exist after the loss happens. Yet, I have a hard time reading the insurance policy, and spend hours each week explaining legal interpretations of clauses to fairly sophisticated risk managers and public adjusters. I do not believe that my wife's 85 year old high school educated grandfather, who worked as a mason until retirement, could accomplish the task Burnette suggests. Could anybody? I doubt most judges and insurance professionals could contemplate the significance of such small changes in advance of a loss. We cannot agree what it means after the loss occurs.

The point is that State Farm attorneys and underwriters understand that words of exclusions can mean whether a lot of money is paid, or not paid, to their customers. They wrote the additional modifications to exclude and limit recovery that other insurers pay.

Why? Obviously, so State Farm customers get less benefit than others after a loss occurs.

When have you ever seen a State Farm advertisement explaining that it has great rates because it will not cover your plumbing leaks, unlike other carriers?

Want another example of why Burnette is wrong? Read the Florida Supreme Court case, Fayad v Clarendon National Insurance Company, 899 So. 2d 1087 (Fla. 2005).

I wrote an amicus brief for United Policyholders in this case to help the policyholders overturn a wrongly decided appellate court decision. Our brief cited an insurance industry written publication to prove that the insurer was wrong. Attorneys for insurers do not like it when we point out their own industry does not support the position they creatively argue in front of judges.

Please note the Florida Supreme Court’s finding that the State Farm policy has broader exclusionary language and provides less coverage than Clarendon:

"The relevant parts of Clarendon's policy read as follows:

SECTION I - EXCLUSIONS

1. We do not insure for loss caused directly or indirectly by any of the following. Such loss is excluded regardless of any other cause or event contributing concurrently or in any sequence to the loss.. . . .b. Earth Movement, meaning earthquake, including land shock waves or tremors before, during or after a volcanic eruption; landslide; mine subsidence; mudflow; earth sinking, rising or shifting; unless direct loss by:(1) Fire; or(2) Explosion …ensues and then we will pay only for the ensuing loss..

. . .COVERAGE C--PERSONAL PROPERTY We insure for direct physical loss to the property described in Coverage C caused by a peril listed below unless the loss is excluded in SECTION I --EXCLUSIONS.. . .3. Explosion.

At the hearing on the summary judgment motion, Clarendon relied on State Farm Fire & Casualty Co. v. Castillo, 829 So. 2d 242 (Fla. 3d DCA 2002), in which the Third District Court of Appeal held that the language of a lead-in provision and exclusion in a policy drafted by [State Farm] excluded coverage for any loss resulting from earth movement regardless of its cause. Based on the Third District's holding in Castillo, the trial court entered summary judgment in favor of Clarendon, finding that coverage was precluded under the earth movement exclusion in Clarendon's policy. On appeal, the Fayads argued that the trial court erred in granting summary judgment because the policy at issue in Castillo contained language in its earth movement exclusion that was materially different from the language in Clarendon's earth movement exclusion. Although the Third District agreed that the exclusion at issue in Castillo was much broader than Clarendon's exclusion, it concluded as a matter of law that "under the plain language of Clarendon's earth movement exclusion provision, there is no coverage for the claimed losses in this case."

The Florida Supreme Court essentially overruled the lower appellate court because State Farm wrote a policy that did not cover for the same type of loss that Clarendon covered:

"In Castillo, the case upon which the trial court relied, the Third District was faced with the question of whether a State Farm earth movement exclusion unambiguously applied to both natural and man-made events...The State Farm exclusion defined "earth movement" as the sinking, rising, shifting, expanding or contracting of earth, all whether combined with water or not. Earth movement includes but is not limited to earthquake, landslide, mudflow, sinkhole, subsidence and erosion. Earth movement also includes volcanic explosion or lava flow . . . .

The State Farm exclusion also had a lead-in provision that provided:

We do not insure under any coverage for any loss which would not have occurred in the absence of one or more of the following excluded events. We do not insure for such loss regardless of: (a) the cause of the excluded event; or (b) other causes of the loss; or (c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss; or (d) whether the event occurs suddenly or gradually, involves isolated or widespread damage, arises from natural or external forces, or occurs as a result of any combination of these....

The Third District concluded that the exclusion, when read in conjunction with the lead-in provision, expanded the scope of the exclusion to exclude from coverage any loss resulting from earth movement regardless of the cause of the earth movement."

The bottom line--State Farm writes less coverage than other common insurance companies. It does so in words and phrases that only those in my line of work could appreciate.

The dirty secret is that many major personal lines and commercial insurers do not provide anything close to security or peace of mind in the product they sell. Do not rely on advertisements. Research what other insurers offer and ask you independent agent if better coverage is available.

If you happen to be insured with one of the major lines insurance companies over a decade, see if you can go back over your policies to review changes. Note how there are more limits of coverage and changes in exclusions. I suggest you get a second opinion from an independent agent to find better coverage for a price you can afford.

I agree with Burnette that his clients’ advertisements mean nothing, although many customers believe the insurance company’s statements and promises. Many advertisements are simply trying to provide brand recognition, so that customers first think of Allstate or State Farm when thinking about buying insurance. Please call other agents and understand that major insurers get away with this because there is little regulation in this area.