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

In Industry, Taylor React To 'Compromise' Senate Wind vs. Water Bill, Taylor's position was noted:

Brian Martin, policy director for Rep. Taylor, contradicted reports that Rep. Taylor believes the Wicker bill is a good compromise between his bill and the five-year NFIP extension recently passed by the House that does not add windstorm coverage to the program.

“Wicker’s bill is not a substitute for Rep. Taylor’s legislation, H.R. 1264, the Multiple Peril Insurance Act,” Mr. Martin said. He said the Wicker bill is just an administrative procedure for resolving "wind vs. water" conflicts between the NFIP and insurance companies.

He noted that Rep. Taylor’s amendment to the five-year extension bill is “slightly similar” to the Wicker bill in that when there is a "wind vs. water" dispute, the homeowner would be paid and then the wind and flood policies would figure out how to allocate the loss.

Mr. Martin said that in Rep. Taylor’s amendment, The NFIP pays the homeowner and gets reimbursed later by the insurer for the wind share.
He explained, “I thought we would have some state and NAIC issues if we tried to make the private insurer pay the homeowner, so that is why we propose in our amendment that the NFIP pay the homeowner and then make the insurer reimburse NFIP after the allocation was decided.”

Currently, Mr. Martin and Rep. Taylor are continuing to seek floor action on the bill to add windstorm coverage to the NFIP.

Brian Martin is a very hardworking staffer working for Taylor's constituency in Mississippi. These flood insurance issues are political, social and financial. I first met Martin when we took a Rimkus engineer to meet Gene Taylor in Washington. The engineer’s original written opinion indicating that wind caused the damage had been changed without his approval to reflect that flood caused the damage. Martin and Taylor were obviously interested in meeting this engineer.

I applaud and wish good luck to Taylor and Martin in their efforts. They have a long, long way to go trying to prevent the heartbreak caused by the insurance industry selling a defective product. And that reminds of a song as our weekend is upon us:
 

In Bill Adding Wind To NFIP Introduced, May Be Discussed This Week, the National Underwriter addressed this recent development:

The House will likely consider legislation on Thursday that would add wind coverage to the National Flood Insurance Program, a plan opposed by the insurance industry.

The bill, H.R. 1264—“the Multiple Peril Insurance Act”—is sponsored by Rep. Gene Taylor, D-Miss. In discussions leading up to the House’s passage of a five-year NFIP extension last week, Rep. Taylor sought to attach an amendment adding wind coverage to the NFIP. But the House Rules Committee ruled it “non-germane” to the main bill, H.R. 5114, the “Flood Insurance Reform and Priorities Act of 2010.”

In a note to colleagues sent today urging their support, Rep. Taylor argued that the bill would save taxpayers billions of dollars by reducing future disaster assistance costs after hurricanes and tropical storms. “As long as wind and flood coverage are in separate policies, there will be gaps in coverage and lengthy disputes over causation after hurricanes,” he said. Rep. Taylor contended that almost all companies in the private property insurance market would benefit from adding wind to the program.

“The NFIP relies on insurance companies to sell federal flood insurance policies,” he said. “The companies keep about 30 percent off the top for agent commissions, administrative expenses and profits, yet bear none of the risk.” This arrangement would continue under his legislation, Rep. Taylor said.

Reflecting the property and casualty industry’s position, Blaine Rethmeier, a spokesman for the American Insurance Association, said, “The entire industry opposes the bill, and no one thinks adding wind exposure to a program that is already $19 billon in debt is a good idea.” (emphasis added)

The strong insurance industry opposition to this legislation was also echoed by the Insurance Networking News in "Insurers’ Wild Week." The article included speculation by one insurance industry lobbyist that Taylor's language was included because of the upcoming election and had little chance of ever becoming law:

"While the Senate ratification of regulatory reform was largely perfunctory, the passage of H.R. 5114, the Flood Insurance Reform Priorities Act of 2010, was replete with last-second drama.

To the consternation of insurers, one of three amendments offered by Rep. Gene Taylor (D. –Miss.), passed by a voice vote and was included in the final bill. The amendment would require private insurers participating in the NFIP “Write Your Own” (WYO) program to remove anti-current causation clauses from their policies. Taylor, whose home was destroyed during Hurricane Katrina and later reached a settlement with State Farm, says the clauses enable participating insurers to shift damage caused by wind to the NFIP.

To be sure, the issue of whether to include coverage for wind damage has been one of the primary issues blocking a long term funding resolution for the NFIP. With the defeat of two of his amendments, a multi-peril insurance bill sponsored by Taylor may come up on the floor as a standalone bill this week. “It’s never over,” jokes Ben McKay, SVP, federal government relations for the Property Casualty Insurers Association of America. Surprisingly, given the number of Republicans representing coastal districts, the vote for H.R. 5114 fell largely along party lines. “There’s a lot of extra stuff in the bill, so if you wanted to find something to love or hate, it’s in there,” McKay tells INN.

[An insurance lobbyist] says that Taylor’s efforts may be largely quixotic, noting that when a bill that included wind coverage appeared in the Senate, there was 85 votes against it. “The Senate won’t pass a bill with wind and [even if they did] the president has said he’ll veto it,” he says. “This may a bit of political gift in a tough election year for Gene Taylor—at our expense.”

Yet, in his remarks on the House floor last week, Taylor’s ardor to include wind coverage seemed genuine as he challenged his colleagues to take up the cause. "Quite honestly, I would like to see which shill for the insurance companies wants to defend what they did to individuals in the Gulf Coast and what they have done to the taxpayers as a whole," he said." (emphasis added)

In April, Slabbed updated everybody on Gene Taylor's efforts in "Let’s talk multi peril insurance and NFIP reauthorization as Slabbed updates the Washington front." That post contained a link to Gene Taylor's testimony on the issue and Anita Lee's coverage of the topic.

Having met with Taylor on this issue and other claims conduct issues following Katrina, I am glad to see he has not given up on finding a way to prevent the insanity of this coverage issue in the future. On his website, Taylor made the following observation regarding what this bill would accomplish:

Another focus of this hearing is H.R. 1264, “the Multiple Peril Insurance Act” which has been introduced by Rep. Gene Taylor (D-MS). After Hurricane Katrina, property owners with an insurance policy expected to be reimbursed for the full damage suffered. However, insurers declined to cover wind damage under the homeowner’s policy if some of the damage was deemed due to flooding, and the NFIP supplement to the policy would only cover flood-related damage. In effect, property owners who had been paying for years for this insurance were caught in the middle of a legal dispute between insurers and the NFIP.

The Multiple Peril Insurance Act would allow homeowners to buy comprehensive insurance and know that hurricane damage would be covered without lengthy legal disputes over how much damage was caused by wind and how much was caused by flooding. Premiums for the wind coverage would be risk-based and actuarially sound. Coverage would be limited. The CBO has scored the bill as budget neutral.

The bill would also reduce future property damage by requiring participating communities to adopt International Building Codes. Windstorm insurance would be available only where the local governments adopt and enforce the International Building Code or equivalent building standards. Thus the bill would not only prevent insurers from shifting liability back to the federal government, it would also save taxpayers money by increasing the number of properties that are mitigated against future wind damage and paid for by insurance premiums rather than post-disaster federal assistance.

In the long run, we will have to pay for the losses we incur. We can do this privately, through the social product of insurance which spreads losses among geographic and time parameters. Similar to the debate about the investment in an energy efficient infrastructure not dependent on carbon, we need promote investment in buildings better hardened against perils of loss. Many of these steps will help reduce the severity of loss risk to private insurers doing business in coastal states.

I hate to sound pessimistic, but I cannot imagine that many insurers would remove a fairly standard clause found in most property insurance policies just to write insurance under the National Flood Insurance Program. I would expect that any final legislation extending the National Flood Program will not require the anti-concurrent clause to be removed from Write-Your-Own policies. And that may be a shame because Taylor's bill would stop the problem many devastated coastal policyholders are forced to resolve following a significant hurricane storm surge.

It is obvious that the insurance community understands the importance of flood insurance:

The National Association of Professional Insurance Agents (PIA) sent a letter to the Senate June 18 urging prompt action on the extension and noting that the NFIP “has slipped into a hiatus.”

PIA National President-elect Brian Marino, co-chair of PIA National’s working group on natural catastrophes, said, “This is a serious situation and the lack of action by Congress is irresponsible.”

He added, “Since the NFIP lapsed, 20 people lost their lives in flash floods in Arkansas, and in May, 29 people were killed in extreme flash flooding in Tennessee, Mississippi and Kentucky. Property damage was extensive everywhere. Allowing the flood insurance program to lapse is just not an acceptable option.”

Mr. Marino added that while no new policies can be issued during a lapse in NFIP authorization, consumers with current flood insurance policies remain covered. Claims payments are not affected.

We will keep up on this important topic.

The New York Times article indicated that many companies hedge against the risk of such failed celebrity endorsements by purchasing insurance:

"Many companies take out death and disability insurance to cover themselves in the event that an athlete or celebrity endorser dies or is injured while under contract. In a new wrinkle, more companies are trying to insure against the potential loss of sales when an athlete product endorser is involved in a scandal.

...

Dan Trueman, who runs the enterprise risk department at R J Kiln & Company...said his firm had seen an eightfold increase in inquiries into this type of insurance between September and December, the bulk from pharmaceutical and financial service companies. “It’s more than just the flavor of the week.”...

Calculating the amount to insure against is not easy. Insurers said they based their assumptions on how much revenue grew after an athlete or celebrity became a company endorser. In some cases, the cause and effect is direct — for example, in the case of signature Tiger Woods golf shirts sold by Nike. But companies that employ athletes or celebrities for more generic brand building are now also looking for financial protection.

...

Insurance policies can cover money paid to athletes as well as the cost of producing and booking television commercials, print advertisements and other promotions. Some insurers will also cover the costs of new commercials with replacement athletes.

...

According to Trueman, the underwriter at Kiln: “Tiger Woods has made people think about their reputations. These days, people don’t worry about the office burning down, but about their intellectual property being damaged.”

In Woods’ Woes Help Market New Coverage, the National Underwriter noted that Woods' scandal has created a significant demand for a new "reputational risk" insurance. There are a number of valuation issues with this type of coverage which are difficult from an underwriting and claim viewpoint:

"Lori Shaw, sports and leisure practice leader for Aon Entertainment Group, said that quite a few companies use celebrity endorsements in their advertising, while noting that in the United States there are usually moral clauses in the contract allowing sponsors to break ties with the individual spokesperson should they do something criminal or against public policy.

However, while there is usually insurance coverage in place in case of a celebrity spokesperson’s death or disability, allowing the company to recoup costs and expenses for the campaign and launch a new one, coverage for damage due to a celebrity scandal is harder to come by.

The trickiest part is creating a policy that will protect revenues or profits from the loss of a campaign, said Ms. Shaw. That means being able to show something quantifiable about the campaign’s effects on the company’s business. “Sometimes [the client] believes it’s a better idea to bear that risk than to transfer that risk because of the perceived cost,” she noted."

Dewitt Stern offers a "reputational risk" coverage and noted in a press release,'Reputation Risk Insurance' Introduced by 110-Year-Old Risk Advisory Leader, Dewitt Stern, that it will even cover lost sales. I anticipate there will be huge differences of opinion on that claims valuation issue because most of my entrepreneurial business clients are optimistic about endeavors and claims managers are generally more pessimistic than a snowball in a heated oven:

"The Tiger Woods scandal shows how quickly reputations can become tarnished in today's fast-paced media environment," said LeConte Moore... "All the planning in the world cannot protect a brand manager against the unforeseen. Reputation Risk Insurance will provide those forward-looking brand managers and advertisers with a...way to protect their investments."

"Reputation is arguably a company's single greatest asset, and in the era of instant information, it is more vulnerable than ever," said Scott Brady...

DeWitt Stern's Reputation Risk Insurance will compensate policy holders for:
• Lost sales;
• Crisis management fees;
• Lost advertising campaign expenses, and
• Pre-committed and incurred endorsement fees."

We can learn lessons from life's tragedies that happen to others. As indicated in Tiger Woods Affair Highlights the Impact of Separation or Divorce on Insurance, coverage can be affected by those events. Fortunately, as indicated here, the insurance product can often help hedge against the financial loss from them as well. For those involved with events that may be dependent on celebrity appearance, I suggest you also read Event Cancellation Insurance and the Michael Jackson Tour.

In a National Underwriter article, "Gov. Crist Says No To Proposed Insurance Deregulation Bill," Crist was on record as saying he does not support the current rate deregulation bill. Consumer groups agree with the Governor:

"The consumer groups reacted favorably to the news. Consumer Federation of America’s (CFA) director of insurance, Bob Hunter, said in a statement, “It is outrageous to claim that this bill falsely promises ‘consumer choice,’ when its purpose is to let insurance companies charge whatever high rate they want with no consumer protections in a market with virtually no competition. The bill is an insurance industry wolf wrapped in consumer-choice-like lamb clothing.”

Birny Birnbaum, executive director for the Center of Economic Justice (CEJ), told NU Online that the bill is similar to legislation that passed the legislature last year but was vetoed by Gov. Crist.

That bill would have allowed homeowners insurers to charge rates not approved by the OIR if they met certain surplus requirements.

Mr. Birnbaum called this year’s bill a “little more far-reaching,” as the capital level limits in last year’s bill do not apply.

“It’s unclear what you’re trying to accomplish with a deregulation bill,” Mr. Birnbaum said.

He noted that the Florida market has shown that it is not competitive, and so competition and market forces will not lead to favorable prices for consumers. Regulatory oversight, he stated, is the only thing protecting consumers from excessive rates."

Birny Birnbaum and Bob Hunter are just about the smartest people I know who are not employed by the insurance industry when it comes to understanding insurance rates. Florida legislators who want to do "the right thing" for Florida and their constituents should listen to them. Governor Crist and Senator Fasano have listened to these scholars and read what they have written about this proposed legislation and that is why their views make a lot more sense. Other legislators are adopting the insurance lobby’s attempts to "spin" this craziness into law and policy.

The three who wrote the letter are Sean M. Shaw, Florida's Insurance Consumer Advocate, Brad Ashwell, democracy and consumer advocate for the Florida Public Interest Research Group, and, Bill Newton, Executive Director of the Florida Consumer Action Network (FCAN). FCAN's Blog recently posted, Insurers Record "Stellar" Profits in 2009, which noted:

According to a news report in National Underwriter, "Panelists said the relative calm of the 2009 hurricane season, as well as some reserve releases, were seen as the key reasons p&c insurers’ net income after taxes totaled $16.2 billion during the first nine months of 2009, nearly quadruple the $4.4 billion in profits earned a year earlier."

Will we see price reductions in Florida now that insurers have banked another year's profits with no hurricanes?...

Despite the good times, the insurers keep crying. We need to see through their game and call their bluff as Insurance Commissioner Kevin McCarty did with State Farm (although later negotiations are questionable.)

Now insurers are saying that deregulation will lead to lower prices. Why should anyone believe them? Their track record is not one of truthfulness. They are exempt from anti-trust laws. If they are now making "stellar" profits, where's the fire?

Call your legislators to put a stop to these games.

I agree with that. This is not a law dreamed up by consumers looking to solve an insurance rate problem. It was devised by the insurance industry to free it from regulation in order to charge whatever the market will bear. I believe that most legislators truly want to make society better with laws they propose and pass. The truth is that insurance lobbyists have done a wonderful job for their clients, providing significant political contributions to key legislators. In return, it is only reasonable to assume they are asking for those legislators to support their agenda.

Yet, this law does nothing for insurance consumers and I said so when it was first introduced in Do Florida Legislators Think We Are Stupid? Similarly, the consumer advocates noted the following:

The sponsors of this legislation mistakenly call this bill the "Consumer Choice" insurance bill. However, the only choice that consumers are given is between higher premiums (based on recent rate filing requests of anywhere for 25 percent to 50 percent) or a move to Citizens' property insurance.

However, this bill does not accomplish any improvement - instead it would significantly hurt Florida's consumers. Deregulation of our property insurance industry rates would allow insurance companies to abuse consumers through excessive rate increases and would hurt Florida financially by overburdening Citizens. We also do not see any hard evidence this bill can achieve its stated goal of attracting new companies to the state.

We call on members of the Florida Legislature to vote against the proposed deregulation bill. If this legislation should pass, we urge Gov. Crist to again veto this type of proposal. We encourage the Legislature to choose what's in the best interest of the citizens of Florida.

Interestingly, the letter indicates what legislators will say regarding their support for the law and the false premise that it proponents sponsor:

Proponents of deregulation claim that it will bring new insurers to the market. However, no insurer has said publicly that they would enter Florida if the property insurance market were deregulated.

The truth is that if rates go through the roof because of this law, there will be more insurance available because many Floridians will not be able to afford to buy as much of it, if at all. Many will just go to another state to do business or live where it is less expensive.

The New York Insurance Department has issued a legal ruling that with certain restrictions a property and casualty insurer can pay claims by issuing prepaid debit cards rather than checks if the claimant agrees.

According to the department, the insurer must make the funds accessible to the claimant within the applicable timeframe for paying settlements; must fully explain all aspects of such a program, including the disclosure of any potential fees to the claimant; make clear that the claimant's participation in the program is voluntary and that the claimant must opt into the program; and must ensure that the claimant has easy and ready access to the funds.

To be fair, the Visa card is optional. Further, it has apparently worked for workers compensation claims. The article further noted positive findings from the New York Department of Insurance:

The department said the insurer said providing claimants a card offers advantages over payment by check, such as immediate access to funds, savings of cash checking fees, and access to millions of ATMs and Visa merchants, 24-hour toll free bilingual customer support as well as security from theft or loss.

What will they think of next?

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.

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.

In 2005, then New York Attorney General Elliot Spitzer filed lawsuits against the major brokerage firms with strong proof of bid rigging and collusion of major policyholder accounts. As part of the settlement of those suits, the large brokerage firms agreed to stop the practice of accepting secret “contingent” brokerage fees from the insurance companies. Now, Illinois has approved contingent fees for one brokerage firm. Many corporate risk managers are not going to be happy with that because they feel the money should go to the policyholder rather than their agents and brokers.

The statement by RIMS was clear:

“RIMS, in its statement released yesterday, said the organization “has consistently stated that contingent commissions should be broadly prohibited as they represent an inherent conflict of interest. …
…
…RIMS suspects “what will happen is that once New York passes this new regulation on transparency and disclosure for brokers to comply with, that the New York Attorney General’s office will probably lift the settlement agreements with the ‘big three’ that they settled with several years ago,” He added, “RIMS favors a prohibition on contingency fees—across the board—because they represent a conflict of interest.”

I suspect that many corporate policyholders may find it financially worthwhile to request their brokers to disclose the contingent fees and ask that the insurer provide a lower rate rather than a greater fee for the agent. I can almost guarantee there will be litigation over this issue in the future if the practice is re-instated.

At page Q&A-1521, the editors had the following coverage discussion:

"What ISO policy exclusion under an HO3, if any, applies to a product defect? We have seen a couple of instances in Louisiana where the insureds are sustaining damage as a result of defective drywall made in China. This was used following Katrina to replenish shortages of drywall supplies."

The answer is very telling and provides hope to policyholders with these problems:

"The ISO HO 03 excludes loss to coverages A & B caused by faulty materials used in repair, construction renovation or remodeling. (See page 12 of the 10 00 policy.) Any ensuing loss as a result of the faulty drywall would be covered, for example if the drywall caused corrosion damage to wires or pipes."

This analysis is helpful, but each policy has to be examined carefully. As recently indicated in my post, “Is the State Farm Policy Worth Anything?” and my reply to Sandy Burnette's comment, “The Dirty Secret of Exclusions Some Major Insurance Companies Like State Farem, Allstate, Nationwide and Even USAA, Do Not Want You to Think About,” every policy has a little different language that can be significant.

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.