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

The purpose of the “proof of loss” is to give the insurance company an adequate opportunity to investigate and to prevent fraud against the insurer before evidence of the loss becomes stale or unavailable. Lee v. Prudential Ins. Co., 812 F.2d 1344, 1346 (11th Cir. 1987).

Unless a policy explicitly states otherwise, the “proof of loss” provision is not automatically triggered in the event of a covered loss. Usually, an insurance company must request the “proof of loss” in order to enforce the provision. If a “proof of loss” is requested, policyholders must comply.

Some courts have reasoned that an insurer can waive its right to request a “proof of loss.” In Laird v. Chicago Insurance Company, Florida’s Third District Court of Appeal found that an insurance company may, by its conduct, waive its right to receive a timely “proof of loss.”

What conduct constitutes waiver?

In Keel v. Independent Life & Accident Insurance Company, the Florida Supreme Court held that an insurer that denies liability under a policy can waive its right to request a “proof of loss.”

Other circumstances may result in the insurer waiving its right to request a “proof of loss.” This blog is focused on Florida law, but every claim is factually unique and each jurisdiction is different.

As such, it is important for policyholders to consult experienced insurance professionals before submitting a “proof of loss” and in determining if they are required to comply with the particular policy provision.

Next week’s blog post will discuss whether a policyholder’s noncompliance with the “proof of loss” provision is a bar to his or her claim.

The amount of litigation over the stages of collapse induced some insurers define the term “collapse.”

Some policies explicitly state that settling, shrinking and expansion is not collapse; however, in the absence of this limitation, some courts have held that when the settling, shrinking or expansion has caused the property to be effectively unusable, there is constructive collapse.

11 Couch on Ins. § 153:69.

Not surprisingly, public adjusters, policyholders and their lawyers have often read these definitions and wondered “is coverage triggered when a building becomes distressed, vacated due to imminent collapse, or only when flattened and destroyed? At what stage in the process is collapse coverage triggered?”

This month, the Eighth Circuit issued its latest opinion on the issue in KAAPA Ethanol, LLC v. Affiliated FM Ins. Co., No. 10-1929, 2011 WL 5217207 (8th Cir. Nov. 3, 2011), and provided some guidance on what constitutes collapse and whether collapse must be imminent in order to trigger coverage. In KAAPA Ethanol, LLC v. Affiliated FM Ins. Co, KAAPA managed a facility that distilled corn into ethanol. The facility structure was insured against property damage by an “all-risk” insurance policy issued by Affiliated FM Insurance Company. KAAPA’s storage tanks “began to lean, their foundations began showing visible signs of distress, and their supporting concrete walls sunk into the ground.” When the insurer denied KAAPA's claim, it filed suit against the insurer to recover the cost of extensive repairs and business interruption losses.

The policy at issue did not define collapse. The policy covered “all risks of direct physical loss or damage to the insured property except as excluded under this policy.” The following exclusions were at issue:

GROUP II. This policy does not insure against loss or damage caused by the following perils; however, if loss or damage not excluded results, then that resulting loss or damage is covered.
* * * * *
2. Defects in materials, faulty workmanship, faulty construction or faulty design.
* * * * *
7. Settling, cracking, shrinkage, bulging, or expansion of [foundations, walls, floors, roofs, or ceilings]. This exclusion will not apply to loss or damage resulting from collapse of: a building or structure; or material part of a building or structure.

The jury heard extensive testimony from structural experts and, after a lengthy trial, found that some losses were caused by “collapse” of the tanks and awarded KAAPA damages of nearly $4 million.

Among several arguments it raised on appeal, the insurer argued that the district court erred in instructing the jury when a “collapse” has occurred under Nebraska law. Specifically, the Eighth Circuit analyzed whether the Nebraska Supreme Court would require imminent danger of collapse before coverage was triggered. The Court noted,

Ever since first-party insurance policies began including “collapse” coverages and exclusions over fifty years ago, courts have disagreed whether the collapse of a structure requires proof of a “falling in ... loss of shape, [or] reduction to flattened form or rubble” (the “rubble-on-the-ground” standard), or only proof of damage that materially impaired the structure's “substantial integrity” (the “material-impairment” standard). Compare Cent. Mut. Ins. Co. v. Royal, 269 Ala. 372, 113 So.2d 680, 683 (Ala.1959), with Jenkins v. U.S. Fire Ins. Co., 185 Kan. 665, 347 P.2d 417, 422–23 (Kan.1959). It is undisputed that the Supreme Court of Nebraska adopted the material-impairment standard in Morton v. Travelers Indem. Co., 171 Neb. 433, 106 N.W.2d 710, 720-21 (Neb.1960), and that standard has since become the majority view. But some courts applying the standard in later cases have ruled that a structure must be in “imminent danger” of falling to the ground, or must be abandoned or taken out of service, before a material impairment will constitute a collapse.

The Eighth Circuit examined law from other jurisdictions which used a material-impairment standard and noted that the majority view requires a showing that actual collapse “be imminent before coverage exists.” See Zoo Props., LLP v. Midwest Family Mut. Ins. Co., 797 N.W.2d 779, 781–82 (S.D. 2011).

In this context, “ ‘[i]mminent’ means collapse is ‘likely to happen without delay; impending or threatening;’ and requires a showing of more than substantial impairment.” Ocean Winds Council of Co–Owners, Inc. v. Auto–Owner Ins. Co., 350 S.C. 268, 565 S.E.2d 306, 308 (S.C. 2002) . . . numerous courts have required proof of a serious impairment “that connotes imminent collapse threatening the preservation of the building.” Fantis Foods, Inc. v. N. River Ins. Co., 753 A.2d 176, 183, 185 (N.J. Super. Ct.App. Div. 2000); accord Assur. Co. of Am. v. Wall & Assocs. LLC of Olympia, 379 F.3d 557, 563 (9th Cir. 2004); Buczek v. Cont'l Cas. Ins. Co., 378 F.3d 284, 290–91 (3d Cir. 2004); Weiner v. Selective Way Ins. Co., 793 A.2d 434, 443 (Del. Super.Ct. 2002). Other cases, while not addressing the issue, have noted that actual collapse was imminent in extending coverage to material impairments of structural integrity.

The court then noted that a structure does not need to be abandoned or taken out of service before a material impairment can be considered a “collapse.” Although evidence as to whether a structure “remained usable and continued to be occupied” may be relevant to whether a “collapse” occurred, it is not necessary or essential that a structure be taken out of service or rendered uninhabitable. See John Akridge Co. v. Travelers Companies, 876 F.Supp. 1, 2 (D.D.C. 1995); Beach v. Middlesex Mut. Assurance Co., 205 Conn. 246, 532 A.2d 1297, 1301 (Conn. 1987); N–Ren Corp. v. American Home Assurance Co., 619 F.2d 784, 788 (8th Cir. 1980).

Although this opinion is based on Nebraska law and is the circuit court’s best guess at how the Nebraska Supreme Court would rule, the opinion is helpful to policyholders and others attempting to decipher their particular insurance policy’s collapse coverage—especially those policies lacking any definition of collapse.

As illustrated in Sentinel Management Co. v. New Hampshire Ins. Co., 563 N.W. 2d 296 (Minn. App. 1997), courts typically focus on the fortuity of the loss or damage actually suffered, rather than the fortuity of the cause of or the acts leading to the loss. In this case, an apartment complex suffered damage due to asbestos contamination of the buildings. The court, in making its determination as to whether or not the loss was fortuitous, first discussed what function an all-risk policy serves. Specifically, it stated that,

Generally, an ‘all-risk’ insurance policy creates a special type of coverage extending to risks not usually covered under other insurance, and recovery under an ‘all-risk’ policy will, as a rule, be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.

Although the insurance company argued that asbestos contamination was not fortuitous because the release of asbestos fibers through ordinary wear and tear was certain to occur, the court disagreed:

An occurrence is fortuitous if the outcome of the event is not known in advance by the insured. This element of risk is central to insurance contracts because one cannot insure against a certainty….A loss caused by a pre-existing defect is fortuitous so long as neither party knew of the defect or expected the loss.

The court further determined that,

The eventual contamination of Sentinel’s buildings was inevitable, due to the presence of asbestos-containing materials. However, it is undisputed on the record before us that neither party was aware that asbestos fibers were being released in the buildings or that the buildings were suffering damage as a result. Thus, so far as all parties were concerned, asbestos contamination was a risk inherent in owning twenty-year-old buildings, but it was not a certainty. Under these circumstances, Sentinel’s asbestos contamination constitutes a fortuitous loss because Sentinel was unaware of the asbestos damage when the insurer’s policy went into effect.

The court reached this conclusion even though the events leading to the release of the asbestos were normal residential and building maintenance activities – clearly not fortuitous acts. This is a good illustration of how courts look at whether the loss was fortuitous, not whether the acts leading to the loss were fortuitous.

Keep in mind that this court applied Minnesota law, and laws vary in different states.

Next week, I will take another look at the fortuity doctrine. Stay tuned.

Experts and courts agree that the very nature of insurance implicitly creates the requirement that a loss is accidental or by chance in order to be a covered loss under an insurance policy. Courts have explained that it is against public policy to allow an insured to collect insurance proceeds for a known or expected loss. Consequently, the fortuity doctrine could create a basis for insurance companies to deny coverage in first-party insurance claims. To be clear though, it is the loss that must be fortuitous and not the event leading to the loss. As stated by Michal A. Hamilton in Introduction to Property Insurance (Insurance Law: Understanding the ABCs, 673 PLI/Lit 155):

To qualify as fortuitous, the loss or damage – rather than the acts causing the loss or damage – must be unexpected at the time the policy is issued. In addition, the loss must be caused by a chance event beyond the insured’s control. Consequently, the fortuity doctrine should prelude coverage for a claim where the evidence establishes that: (1) at the time the policy was issued, the insured reasonably foresaw the loss or damage it sustained; and (2) the insured failed to take action, knowing that such inaction might predictably result in loss or damage.

Put another way, a loss is fortuitous if it:

[R]esulted from a ‘risk,’ as contrasted with being an ordinary and almost certain consequence of the inherent qualities and intended use of the property.

30 A.L.R. 5th 170 §3.

Now that I have explained the fortuity doctrine, next week I will explain how courts apply the fortuity doctrine to specific sets of circumstances.

WHAT IS COINSURANCE?

Coinsurance is a property insurance provision that penalizes the insured's loss recovery if the limit of insurance purchased by the insured is not at least equal to a specified percentage (commonly 80 percent) of the value of the insured property.. For example, if a building valued at $250,000 is insured with a policy containing an 80% coinsurance clause, the policyholder must purchase at least $200,000 in coverage. If the policyholder purchased less than $200,000, he or she would be responsible for a proportionate share of the loss.

IS A COINSURANCE CLAUSE VALID?

Most commonly, yes. Some states, including Kentucky, have passed statutes voiding coinsurance clauses in property insurance policies which insure risks associated with fire or storm damage on real property. However, in states that have not passed a statute prohibiting coinsurance clauses, courts follow the common law and uphold them.

HOW IT WORKS

The basic formula for determining whether you have enough coverage is:

Actual Amount of Insurance divided by the Required Amount of Insurance then multiplied by the Amount of Loss. This equals the amount the insurance company will pay, less any applicable deductible.

More plainly, let's assume we have a building valued at $100,000. Under an 80% coinsurance clause, an insured would be expected to insure 80% of these values, or $80,000.

Now, let's consider two scenarios, the amount of the loss in each case is $30,000:

First, the policyholder only carries $50,000 in coverage:

($50,000/$80,000) x $30,000 = $18,750 (less deductible). The policyholder is forced to pay, or self-insure, the shortfall of $11,250.

Second, the policyholder carries the full $80,000 required under his policy:

($80,000/$80,000) x $30,000 = $30,000 (less deductible). In this example, the policyholder would receive full benefits.

Some policyholders choose to self-insure and rely on savings. However, most policyholders purchase insurance with the intent to be fully covered. As the examples illustrate, the unknowing policyholder can suffer great financial hardship by not purchasing the amount of insurance required by the coinsurance provision.

It is important that all policyholders know whether their policies contain a coinsurance clause and, if so, whether they have purchased the amount of insurance required to receive the full benefits they expect. Regular appraisals can ensure that property values, inflation, and depreciation are taken into account in your insurance limits. An evaluation or appraisal once every three years is a good rule of thumb, but may or may not be sufficient depending on the circumstances.

An example of the typical wind-driven rain policy limitation/exclusion is:

We will not pay for loss or damage to the interior of any building or structure, or the property inside the building or structure, caused by rain, snow, sleet, sand or dust whether driven by windstorm or not, unless the direct force of Hurricane, other Wind, or Hail damages the building or structure causing an opening in the roof or wall and the rain, snow, sleet, sand or dust enters through this opening.

Courts across the United States have given the limitation/exclusion various interpretations. In Florida Windstorm Underwriting v. Gajwani, the Florida trial court entered judgment in favor of the insureds for coverage. The insurer appealed and argued there was no evidence that a windstorm damaged the exterior of the building allowing the water to enter. In Gajwani, the parties basically agreed that the water entered by seeping through existing openings to reach the interior of the building. The Florida Third District Court of Appeal upheld the policy limitation/exclusion and rejected the insured’s argument that it was against public policy to allow the Florida Underwriting Association (Citizens’ predecessor) to exclude such damage.

This policy limitation/exclusion is not only asserted in hurricane claims, it arises in different loss situations across the country. The question often arises whether a windstorm was the direct cause of loss. For example, in Granchelli v. Travelers Insurance Company, the Appellate Court in New York State interpreted whether a windstorm was the direct cause of damage to the interior of The Palace Theater in Lockport, New York. (I recall attending movies at The Palace Theater as a kid; Lockport, N.Y. is my hometown). The policy in the Granchelli case insured against direct loss “by windstorm or hail.” In February 1985, the theater sustained water damage to the interior of the property causing approximately $116,000, in damages. A windstorm had blown open a door on the roof, and subzero air entered the building, causing a pipe to freeze and burst, resulting in the water damage. The insurer denied coverage on the ground that the theater’s loss was not a direct loss caused by the windstorm within the meaning of its policy. Burst water pipes was an excluded cause under the policy.

The trial court granted the insurer’s motion for summary judgment and found that, while the windstorm was a link in the chain of events leading up to the loss, it was too remote to be the direct cause of the loss. The appellate court disagreed, holding that direct loss is equivalent to proximate cause. The court concluded that the burst water pipe could have been proximately caused by the windstorm. The court overturned the judgment for the insurer and remanded the case to the trial court.

Unrepresented policyholders may often think that their property insurance policies should be commonsense. If the interior of their insured building is damaged, it should be covered. As this brief explanation of the wind-driven rain exclusion and direct windstorm damage requirement reveals, it is not always that easy. If insureds discuss their claims with insurers before having the claims reviewed by their own professionals, the insurers’ one-sided conclusions can have detrimental consequences on the coverage case. The term “opening” is not often defined in policies, and there can be situations where water enters through an “opening” that may not even be visible to the untrained eye.

As discussed many times in the Property Insurance Coverage Law Blog and the Condominium Insurance Law Blog, property insurance policies contain a maze of detailed exclusionary and limiting provisions. Policies of insurance are filled with legal buzz words that present a gauntlet of challenges for the policyholder to navigate through in a coverage case. Being aware of this fact and using the appropriate damage consultants is often critical for policyholders to put together the damage claim in support of coverage.

Generally, “inherent vice” implies that no external or extraneous peril caused the loss; rather, the loss or damage results from the internal composition of the property, or some aspect of the property that brings about its own destruction. See Harmon v. Safeco Insurance Co. of North America, 24 Kan. App. 2d 810, 954 P. 2d 7, 10 (1998). “Latent defect,” on the other hand, generally refers to a defect not readily observable or discoverable upon reasonable inspection. See Board of Education of Maine Township High School Dist. 207 v. International Insurance Co., 292 Ill. App. 3d 14, 684 N.E. 2d 978, 990, app. Denied, 175 Ill. 2d 523, 689 N.E. 2d 1137 (1997).

Of course, even those definitions are subject to interpretation. A good illustration of a latent defect can be found in Acme Galvanizing Co., Inc. v. Fireman’s Fund Insurance Co., 221 Cal. App. 3d 170, 270 Cal. Rptr. 405 (1990). There, a steel kettle at one of Acme’s plants ruptured, allowing several tons of molten zinc to spill onto surrounding equipment. Acme’s insurance claim was denied by Fireman’s on the ground that the loss was caused by a latent defect or inherent vice and was excluded.

During the investigation of the claim, Acme had an expert examine the kettle. The expert ultimately opined:

I believe that the kettle failure was principally due to poor welding techniques. The weld is just not adequate for the service intended.

Fireman’s concluded that the policy exclusion for “inherent vice and latent defect” applied and their report further explained:

In conclusion, the inadequate weld seam was an internal characteristic of the kettle which was not readily detectable upon reasonable inspection. In support of this conclusion, we observe that the defect could only be found by [your expert] after destructive testing was performed.

The court, after looking at conflicting case law and California’s Code of Civil Procedure, held that

[a] latent deficiency [i]s one which is not apparent by reasonable inspection….Here, Acme’s expert established…that the kettle rupture was caused by inadequate welding due to a defective design of the welding. The expert was able to reach this conclusion only after examining an assembly drawing of the kettle, and stated that further analysis could be made by radiographic and ultrasonic testing. We conclude such evidence establishes the welding defect was not apparent upon reasonable inspection, but was a latent defect, as a matter of law….To hold the reverse would be to render the phrase ‘latent defect’ meaningless and to transmute the insurance policy into a type of warranty.

While this case is a good illustration of one court’s interpretation of the term latent defect, California courts changed the test in a later case. No longer is a latent defect simply one that is not apparent upon reasonable inspection. Instead,

A latent defect is one which is both not readily observable and not discoverable to any but the most searching examination.

Keep in mind that these cases mentioned apply the law of their respective states, and that laws in other states may vary. Stay tuned for another edition of Deconstructing the All-Risk Policy.

To demonstrate the importance of reviewing insurance coverage, I want to revisit a North Carolina case that considered claim preparation expenses. If you have been following Michelle Claverol’s posts on understanding business interruption claims, you will remember Fountain Powerboat v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D. N.C. 2000) was discussed in The Value of Ingress/Egress Coverage - Understanding Business Interruption Claims, Part 33. Michelle's post discussed the Court’s interpretation of the policy coverage for loss caused by lack of access to a facility. I am writing about another aspect of the case -- coverage for claim preparation expenses.

Hurricane Floyd struck North Carolina on September 15, 1999. At that time, in Washington, North Carolina, Fountain Powerboat Industries’ manufacturing facility and corporate headquarters were affected by the hurricane. Fountain Powerboats made a claim for flood damage, business interruption and reduction losses. The location of Fountain Powerboats was a critical factor impacting their business after the hurricane. The only way to reach Fountain Powerboats’ required travel on US Highway 17 to Whichard’s Beach Road. When Hurricane Floyd struck North Carolina, it caused devastating flood damage and record-setting rainfall in many of the eastern counties. According to the North Carolina Department of Transportation, the only roads that lead to Fountain Powerboats were flooded for several days, and Whichard’s Beach Road was closed from September 16 to September 25, 1999.

Fountain Powerboats tried to keep operations going, but, due to the poor road conditions, they were forced to used large trucks to shuttle workers from “pick-up points” and transport them to the facility. As a result of Hurricane Floyd, Fountain’s production fell to 33% of full capacity and production did not return to normal until October 25, 1999.

At the time of Hurricane Floyd, Fountain Powerboats was insured with Reliance Insurance Company. Reliance issued nearly $1,000,000.00 for the flood damages to the building, but failed to pay for the business interruption and reduction losses.

In The Value of Ingress/Egress Coverage - Understanding Business Interruption Claims, Part 33, you can learn more about how the court treated the policyholder’s appraisal demand and the interpretation of the ingress/egress coverage.

Another issue in the case was Fountain’s claim for preparation expenses incurred in connection with the loss.

Section VII, part O of the Fountain Policy provided:

VII: Extension of Coverage

This policy covers:
…

O. Claim Preparation Expenses

Expenses incurred by the Insured or by the Insured’s representative including Auditors, Accountants, Appraisers, Lawyers, Consultants, Architects, Engineers or other such professionals in order to arrive at the loss payable under this policy in the event of a claim. This provision does not cover expenses incurred for the services of any public adjuster.

In order to present the claim to Reliance, Fountain hired Allan Klotsche as its risk manager for the loss. While Klotsche held adjusting licenses in other states, he was not acting as or licensed in North Carolina as a public adjuster. Reliance argued it did not have to pay for claim preparation services provided by Klotsche because his work resembled claims presentation work by a public insurance adjuster.

At the time of the loss, Klotsche was working as the VP and CEO of T.E. Brennan Company, a risk management and employee benefits consulting firm in Wisconsin. Klotsche first started helping Fountain ten years prior to the hurricane when he developed an insurance program for Fountain.

According to the deposition testimony, Klotsche provided “input regarding Fountain’s claim for its destroyed yacht mold, the extended period of indemnity and loss of ingress and egress.” However, Klotsche did not prepare any of the documents presented to Reliance in support of Fountain’s claim. Klotsche attended a meeting with Reliance about the yacht mold, explained coverage to Fountain, and collected and organized data on the business loss that he used to negotiate on Fountain’s behalf.

The Court ultimately determined that the claim preparation performed by Klotsche was done as a consultant and not as a public adjuster, and that this work was covered under the policy.

The Court reasoned:

Klotsche clearly assisted Fountain in the preparation of its claim and reported to Fountain. The main point of difference is whether Klotsche investigated the claim…The evidence supports a conclusion that Klotsche’s actions are more in line with a consultant than a public adjuster. There is no evidence that Klotsche independently tracked down information through inquiry. Rather, Klotsche took information given to him by Fountain and gave Fountain his professional advice and services. Therefore the fees… are covered….

This case shows that expert assistance in claim preparation can be covered under certain insurance policies, but that insurers will often argue for the most narrow and restrictive interpretation of the policy language. It is critical for an insured to understand exactly what is covered before incurring expenses.

After more than 30 years in the industry, Klotsche retired from the insurance industry and moved to Florida with his wife, Judith. Klotsche now devotes his time to helping the Big Brothers/Big Sisters. He serves as Advisory Board Chairman Emeritus, and in 2007, was awarded the Volunteer of the Year Award for his services.

While waiver and estoppel have been held applicable to nearly every area in which an insurer may deny liability, some jurisdictions hold these concepts are not available to prevent an insurer from denying coverage where it knows the policyholder is not in compliance with policy conditions. The justification for this rule is the insurer should not be required by waiver or estoppel to pay a loss for which it did not charge a premium. Fortunately for policyholders, when an insurer issues a policy with knowledge that a condition under the policy is arguably not met, many courts find the insurer has waived that provision and is estopped from denying coverage.

The Supreme Court of Arkansas extended the waiver and estoppel doctrines to provide coverage under an insurance policy in Home Mut. Fire Ins. Co. v. Riley, 480 S.W.2d 957 (1972). In Riley, the insured notified the insurer that a tenant was moving out of the insured property. The agent made no mention of the policy requirement that coverage would be dropped if the house remained unoccupied for 30 days. The insured was told by the insurer that the residence was still covered, even though it remained unoccupied for more than 30 days. After a fire destroyed the insured property, the insurer denied coverage, citing the unoccupancy exclusion. The Court found this evidence was sufficient to show waiver of the occupancy requirement and ruled the insurer was estopped from denying coverage.

Likewise, the Supreme Court of Indiana, in Huff v. Travelers Indemnity Company, 363 N.E.2d 985, 993 (Ind. 1977), described this type of provision as a “broken condition” that cannot be breached. When a policy is agreed to, even though one of the terms is openly violated at the time of formation, the policy should be read and enforced as if the condition did not exist. A policy entered into with “broken conditions” cannot be breached for non-compliance with those conditions.

These courts, among others, continue to protect policyholders from unfair treatment by insurance companies. But policyholders cannot count on courts to protect them against their own mistakes. Policyholders should read their policies, and ask their insurers to clarify any questionable provisions.

One common issue that arises when this exclusion becomes relevant is how to define smoke, vapors or smog. Does the term smoke include harmful vapors? Do vapors differ from smoke, especially if they cannot be seen? A clear illustration of this is found in K & Lee Corp. v. Scottsdale Insurance Co., 769 F. Supp 870 (E.D. Pa. 1991).

In this case, employees of a wholesale grocery warehouse noticed a chemical smell and a chemical substance dripping from the floor above which was not under their control. Much of the inventory was destroyed by this chemical contamination and the grocery warehouse filed an insurance claim. The policy specifically stated that smoke damage was covered. However, the issue for the court was:

Whether coverage for ‘smoke’ damage encompasses contamination by chemical vapors.

Because it was unable to find any case law to provide direction on how to interpret the term “smoke,” the court turned to the dictionary and stated,

While smoke may result from some chemical reactions, the common usage of the term refers to the products of combustion and, more importantly, to matter that is visible.

Unfortunately for the grocery warehouse, the chemical vapors were invisible, so the court denied coverage for the claim.

Invisible chemical vapor is not ordinarily and commonly understood to be ‘smoke.’

Not all courts have reached the same conclusion. Laws vary in different jurisdictions. Next week, I will discuss a case that found vaporized chemicals fit within the definition of smoke.

European Woodcraft regularly used Global Insurance Services to obtain its insurance. Citizens appointed Global Insurance Services as its Florida licensed agent, giving Global the authority to submit insurance applications. Citizens supplied Global with the application forms and an agency number. European Woodcraft asked Global to obtain windstorm insurance for its new property. Global secured a quote from Citizens and faxed a letter with an insurance application to European Woodcraft. The letter said that to bind coverage, a premium check was required along with the application. A Global representative incorrectly completed a section of the application, and European Woodcraft’s principal signed the application, despite the incorrect information within it. The application stated the following right above the signature line:

I hereby certify that the information on this application is true and correct to the best of my knowledge. I further understand and agree to the terms as set forth on page 2.

The principal of European Woodcraft did not review page 2 of the application before signing it. On July 18, 2005, Citizens notified Global that the premium check was void for insufficient funds. A Global representative notified European Woodcraft of the problem. European Woodcraft sent a new check to Global, and thought that once the check was sent to Citizens the insurance would be in place. On July 28, 2005, after receiving the application and new check for the premium, Citizens determined a mistake was made on the application. The correct property designation on the application increased the premium amount. Citizens sent a notice of deficiency to Global and to European Woodcraft’s address listed on the application. The notice indicated that a policy would not be issued until the full premium was paid. European Woodcraft’s notice was returned as undeliverable. Global received the notice, but apparently never communicated with European Woodcraft on it. On October 5, 2005, Citizens returned the premium paid after receiving no additional funds, closed its file, and advised that no coverage existed. Hurricane Wilma damaged European Woodcraft’s property shortly thereafter.

European Woodcraft filed a claim with Citizens and was informed there was no coverage. European Woodcraft filed suit against Citizens seeking coverage, and after a bench trial, the trial court entered judgment in favor of European Woodcraft. Citizens appealed. The first issue on appeal was whether Global was Citizens’ general lines agent and had apparent authority to bind Citizens into coverage.

Providing company forms and materials to insurance agents has been held sufficient in Florida to designate a broker as an agent. This is known as apparent authority. An insurer may be liable for the action of those it cloaks with apparent authority. However, an insurer will not be bound by the agent’s actions if the insured knew or was put on “notice of inquiry” of limitations on the agent’s actual authority. The trial court found no evidence that European Woodcraft was ever put on notice of limitations on Global’s authority to bind coverage. The appellate court noted, however, that the application stated the following on page 2:

Effective date of coverage is upon approval of Citizens. No insurance agent has the power to bind coverage or make the policy effective. Receipt by agents of premiums is not receipt by Citizens and does not make the policy effective. Applicants must not rely on representations of any party other than Citizens in its Tallahassee or Jacksonville Offices.

That provision provides actual notice on the limitations of Global to bind Citizens to coverage. Since European Woodcraft never received page 2 of the application, the next issue was whether it was placed on notice of inquiry regarding those limitations. The Court noted that directly above the signature line on page 1 of the application, it stated, “I further understand and agree to the terms as set forth on page 2.” The Court applied the “reasonable person” standard, and held that:

A reasonable person under these circumstances would have actually read page 2 and discovered the agency disclaimer. A person has no right to shut his eyes or ears to avoid information, and then say he has no notice; that it will not suffice the law to remain willfully ignorant of a thing readily ascertainable by whatever party puts him on inquiry, when the means of knowledge is at hand.

The Court reversed the judgment and remanded the case for further proceedings.

Now that we are in the middle of hurricane season, it is important to double check your insurance policies to ensure coverage and that the premiums have been paid. It may even be a good practice to call your agent to have them verify coverage as well. Remember life’s experiences make us stronger, but in this situation, discovering after a loss that you do not have insurance coverage is likely an experience you would rather do without.

As one court put it,

The purpose of the standard wear and tear exclusions in an All-Risk policy is to remove from coverage the repair and replacement of property that deteriorates or has defects occurring over time.

Commonwealth Ins. Co. v. Stone Container Corp., 2002 WL 31833862 at *6 (N.D. Ill. 2002).

The case of Murray v. State Farm Fire & Casualty Co., 219 Cal. App. 3d 58, 268 Cal. Rptr. 33 (1990), illustrates how the wear and tear exclusion works. The Murray’s discovered a crack in the foundation of their home that resulted from a broken water pipe some 23 inches below the concrete slab floor. The Murrays filed a claim with State Farm, but we unable to recover the amount of damages they felt were necessary to fix the broken pipe and cracked foundation. They filed suit, and State Farm argued the loss was not covered because the pipe broke due to deterioration. Both the Murrays’ and State Farm’s experts agreed that the pipe did deteriorate over the course of approximately a year.

The Murrays’ homeowners policy excluded coverage for the following:

e. leakage or seepage of water or steam unless sudden and accidental from a:…plumbing system, including from or around any shower stall or other shower bath installation, bath tub or other plumbing fixture. If loss is caused by water or steam not otherwise excluded, we will cover the cost of tearing our and replacing any part of the building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which the water or steam escaped.

f. wear, tear, marring, deterioration, inherent vice, latent defect, and mechanical breakdown…

As the experts agreed, the court had a fairly easy decision to make. The court noted that,

[A]ny different decision would convert their homeowners’ insurance policy into a maintenance agreement, contrary to the fundamental rule of construing insurance policies which requires that contracts of insurance…be viewed in the light of their general objects and purposes.

Keep in mind that this court applied California law in reaching its decision, and the law may differ in other jurisdictions.

Florida’s Fourth District Court of Appeals was recently faced with this question in the case Certain Interested Underwriters at Lloyd’s v. Chabad Lubavitch of Greater Ft. Lauderdale, Inc., No. 4D10-762, 2011 WL 2200756 (Fla. 4th DCA June 8, 2011). A building owned by Chabad Lubavitch was damaged when a crane fell on it during Tropical Storm Barry. At the time of loss, Chabad Lubavitch had two policies on the damaged building. The first, which is involved in the case, was an “all risk” policy issued by Lloyd's. It contained the following “Windstorm or Hail Exclusion” provision:

We will not pay for loss or damage:

1. Caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage; or

2. Caused by rain, snow, sand or dust, whether driven by wind or not, if that loss or damage would not have occurred but for the Windstorm or Hail.

But if Windstorm or Hail results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss. For example, if the Windstorm or Hail damages a heating system and fire results, the loss or damage attributable to the fire is covered subject to any other applicable policy provisions.

The other policy covered only wind damage (“the wind policy”). Prior to making a claim under the all risk policy, Chabad Lubavitch made a claim under the wind policy for the storm damage and received the policy limits.

Chabad Lubavitch then made a claim under the all risk policy with Lloyd’s for the same storm damage. Lloyd’s filed a complaint for declaratory judgment, seeking a determination that the all risk policy’s windstorm exclusion excluded the loss since it was caused by the wind in the storm. Chabad Lubavitch countersued for breach of contract because of Lloyd’s failure to pay the claim filed under the policy. Both parties moved for summary judgment. Lloyd’s’ argument before the trial court was based on the theory that Chabad Lubavitch’s submission of the claim under the wind policy constituted an admission that the loss was caused by wind.

Chabad Lubavitch countered that the crane striking the building was the cause of damage, not wind. Chabad’s argument focused on the exception within the windstorm exclusion provision, which stated that “if the Windstorm or Hail results in a cause of loss other than rain, snow, sand or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss.” According to Chabad Lubavitch, the crane striking the building was “a cause of loss other than rain, snow, sand or dust,” resulting from wind.

The trial court concluded that the windstorm exclusion was ambiguous and should be construed strictly against Lloyd’s to cover the damage to Chabad Lubavitch’s building. Lloyd’s appealed that ruling to the Fourth District Court of Appeal. The Fourth District Court of Appeal concluded that the trial court erred in finding that the windstorm exclusion was ambiguous. The Court noted that the windstorm exclusion unambiguously provides that if a loss or damage is caused by a windstorm, the loss is not covered, regardless of any other cause or event that contributes to the loss. Contained within the exclusion is the exception to the exclusion (the ensuing loss provision), which provides that if a windstorm “results in a cause of loss other than rain, snow sand or dust, and that resulting cause of loss is a Covered Cause of Loss,” the loss will be covered.

The Fourth District held that the plain language of the ensuing loss provision means that if a windstorm sets in motion another cause, which is not excluded by the policy, and that intervening cause results in a covered loss, the windstorm exclusion does not apply and the loss would be covered by the policy.

Lastly, the Court noted that the parties could not agree what caused the crane to fall. The Court held that the factual determination is essential because the exclusion could only apply if the crane fell from its perch because of the wind, aided only by gravity and not some other intervening cause. For this reason, the Fourth District remanded the case to the trial court to resolve that factual issue.

This case reveals the importance of policy interpretation, and also how the facts determine coverage in first party property insurance claims. Small factual changes potentially result in drastically different outcomes in a coverage evaluation.

In the end, “it’s all about the facts Jack.”

Mold exclusions often contain language like:

This policy does not apply to any loss or damage caused by or resulting from the actual or threatened existence, growth, release, transmission, migration, dispersal or exposure to mold, spores or fungus.

As phrased, this exclusion may lead one to believe that any and all damage stemming from mold would be excluded. While many times mold damage will be excluded, there may be other avenues for recovery under the policy. Before looking at those other avenues, I want to first begin with a case in which coverage was denied.

In Merrimack Mutual Fire Insurance Company v. McCaffree, 486 S.W. 2d 616 (Tex. App. 1972), the insureds faced a mold problem in their shower stall. The shower stall lacked a shower pan and consequently, the water from the shower leaked onto the wood underneath the shower stall. Of course, the water caused the wood to rot and the growth of fungus and mold. The insurance policy contained an exclusion that read:

This insurance does not cover…loss caused by inherent vice, wear and tear, deterioration, rust, rot, mold or other fungi, dampness of atmosphere, extremes of temperature, contamination, vermin, termites, moths or other insects…

The court ruled that denial of coverage was appropriate, reasoning that “since the damage or deterioration to the property was admittedly directly caused by fungi, and to some extent by termites, such would bring it clearly within the exclusion of the contract.”

The court based its decision largely on the fact that mold – along with termites – was the direct, or proximate, cause of damage. Keep in mind, though, that this case applied Texas law and that the laws are different in every state.

Mold exclusions are relatively straightforward, but many of you may be wondering what happens when mold damage is the result of some other damage. Great question. The answer is: It depends – if the “other damage” is a covered peril, then the policyholder may be in luck. Next week I will write about a case that found mold damage was covered even though the policy at issue contained a mold exclusion.

When purchasing an all-risk policy, understand that you almost certainly will not be covered for every possible loss. In fact, as I alluded last week, there are always exclusions contained within an all-risk policy which limit the instances in which you may recover damages from your insurance company. As one court put it,

The label ‘all risk’ is essentially a misnomer. All risk policies are not ‘all loss’ policies; all risk policies…contain express written exclusions and implied exceptions which have been developed by the courts over the years…. In a nutshell, a policy of insurance insuring against ‘all risks’ is to be considered as creating a special type of insurance extending to risks not usually contemplated, and recovery will usually be allowed, at least for all losses of a fortuitous nature, in the absence of fraud or other intentional misconduct of the insured, unless the policy contains a specific provision expressly excluding loss from coverage. Ariston Airline & Catering Supply Co., Inc. v. Forbes, 511 A. 2d 1278, 1282 (N.J. Super Ct. Law Div. 1986) (internal citations omitted).

The Third Circuit of the United States Court of Appeals stated,

The term ‘all-risk’ has been said to be somewhat misleading. ‘All-risk’ is not synonymous with ‘all loss.’ Indeed, the question of ‘loss’ and ‘risk’ are separate and distinct….Under an ‘all-risk’ policy, the only questions which need to be answered…are whether the plaintiff has suffered a loss and, if so, whether such loss is excluded from coverage under the policy. Intermetal Mexicana, S.A. v. Insurance Co. of North America, 866 F. 2d 71, 75 (3d Cir. 1989) (internal citations omitted).

Be sure to understand that even though a policy may be sold as an “all-risk” policy, there are exclusions that may preclude recovery. This highlights the importance of reading each line of your policy so that you completely understand what losses are not covered.

Next week I will begin my discussion of specific exclusions. Stay tuned!

According to Murphy, Downs, and Levin in Property Insurance Litigator’s Handbook:

An Extended Coverage Endorsement added coverage for windstorm, hail explosion, riot, civil commotion, aircraft, vehicles, and smoke. Yet another, the Additional Extended Coverage Endorsement, which carried a fifty-dollar deductible, could be purchased to add coverage for accidental discharge of water, vandalism, ice, snow, freezing, fall of trees, and collapse.

Around the same time, consumers were finally able to purchase coverage for contents of their homes and additional living expenses. Perhaps the most important changes, however, were yet to come. Murphy, Downs, and Levin wrote,

The 1950’s brought two very important developments: the multi-line dwelling policy and the “all risk” policy. New legislation permitted insurers to underwrite risks for both property and liability exposures. Consequently, insurers began experimenting with multiple line policies that provided “all risk” coverage for dwellings and “comprehensive personal liability coverage.” These early all risk policies typically excluded loss by war, earthquake, flood, faulty workmanship, and wear and tear type losses.

The next round of significant changes came in the late 1970’s with the advent of the ‘Easy to Read Policy.’ Consumer activists, regulators, and legislators sought a change from the standard fire policy. They argued that the standard policy’s print was too small, that the format was confusing, and that the language was stilted, archaic, and ambiguous….In response, underwriters developed Easy to Read policies. These policies packaged everything neatly into the basic layout and format still in use today.

While these developments helped make policies easier to understand, as many of you know all to well, ambiguities still occur.

In the coming weeks, I will break down some of the most common exclusions to all risk policies. Tune in next week.

Leonard E. Murphy, Andrew B. Downs, and Jay M. Levin edited the Property Insurance Litigator’s Handbook, which gives a great synopsis of the evolution of property insurance. They explained:

Property insurance finds its roots in fire insurance. The business of underwriting the risk of loss by fire originated in England in the late 1600s. After the great fire of London in 1666, a doctor and builder began insuring newly constructed buildings against loss by fire.

These early policies, first replicated in the United States in the mid-1700s, only covered damage to the building caused by fire. Personal property inside the building and other perils, such as windstorms and accidental discharge of water, were not covered. While consumer demand would lead to coverage for additional perils, both insurance companies and insureds were more immediately concerned about creating uniformity among insurance policies and making them easier to understand. Murphy, Downs and Levin wrote:

Beginning in the late 1800s, the industry, along with others including the National Association of Insurance Commissioners, began developing a standard fire insurance policy. After decades of various efforts including variations of a standard form, most states settled on the New York Standard Fire Policy. This standardized policy contains a mere 165 lines of text. In many states, this form still establishes the minimum coverage required to be provided by property insurers.

Soon thereafter, consumers demanded coverage for additional perils. Next week, I will write about how additional perils were added to the standard fire policy and, in subsequent weeks, discuss some of the most common exclusions from “all risk” policies. Stay tuned.

Chabad owned a building with an “all risk” insurance policy which contained the following windstorm exclusion:

We will not pay for loss or damage:

1. Caused directly or indirectly by Windstorm or Hail, regardless of any other cause or event that contributes concurrently or in any sequence to the loss or damage; or

2. Caused by rain, snow, sand, or dust, whether driven by wind or not, if that loss or damage would not have occurred but for the Windstorm or Hail.

But if Windstorm or Hail results in a cause of loss other than rain, snow, sand, or dust, and that resulting cause of loss is a Covered Cause of Loss, we will pay for the loss or damage caused by such Covered Cause of Loss. For example, if the Windstorm or Hail damages a heating system and fire results, the loss or damage attributable to the fire is covered subject to any other applicable policy provisions.

As you might expect, Chabad’s building suffered a loss stemming from a windstorm; a crane fell onto the building during Tropical Storm Barry. Chabad successfully argued to the trial court that the last paragraph of the windstorm exclusion, taken as a whole, created an ambiguity, so the policy should be interpreted to provide coverage. On appeal, Lloyd’s convinced the Fourth District Court of Appeal that, for the policy to provide coverage, the windstorm must set in motion a series of events which leads to a different and covered cause of loss, such as fire.

In reaching the conclusion that there was no coverage, the majority relied on the example given in the exclusion. But one dissenting judge noticed an inconsistency between the example given and the sentence preceding it. He opined that “a crane falling on Chabad’s building is ‘a cause of loss other than rain, snow, sand or dust,’” which created ambiguity.

Although the majority sided with the insurance company, the case provides a valuable lesson. Insureds must read the policy they plan to purchase, and, if there are questions, ask the insurer (preferably in writing) so there will be no confusion regarding the coverages and exclusions.

One of the most cited cases for this proposition is the Texas Supreme Court case of Nat’l. Union Fire Ins. Co. of Pittsburgh, PA v. Hudson Energy Co., Inc., 811 S.W.2d 552 (Tex. 1991). Nat’l. Union dealt with an aircraft insurance policy, but the same principles apply to all insurance policies. Specifically, the Texas Supreme Court case stated the following regarding ambiguities in insurance policies:

Generally, a contract of insurance is subject to the same rules of construction as other contracts. . . . [I]f a contract of insurance is susceptible of more than one reasonable interpretation, we must resolve the uncertainty by adopting the construction that most favors the insured. The court must adopt the construction of an exclusionary clause urged by the insured as long as that construction is not unreasonable, even if the construction urged by the insurer appears to be more reasonable or a more accurate reflection of the parties’ intent. In particular, exceptions or limitations on liability are strictly construed against the insurer and in favor of the insured. This [sic] our inquiry is whether the construction advanced by [the policyholder] is a reasonable interpretation.

As long as a policyholder presents a reasonable interpretation of an ambiguous provision within his/her insurance policy, the Texas courts should rule in the policyholder’s favor. This rule applies even if the insurer presents a “more reasonable or more accurate reflection of the parties’ intent.

Policyholders are sometimes faced with the option of purchasing an “All Risk” insurance policy that would, by its name, suggest that it covers all risks. In his book Delay Deny Defend, author, professor and expert Jay M. Feinman writes about how an “All Risk” insurance policy does not necessarily cover all risks:

In the insurance business, all risks does not mean all risks, the presence of a hurricane deductible does not mean that damage caused by a hurricane above the deductible amount is covered, and even if damage is caused by a risk covered by the policy, it may not be covered. Under an all-risk policy an insurance company does not cover damage from any source. In its underwriting, the company determines that risks of a certain kind are too great to be covered under the standard premium, or perhaps to be covered at all, so it excludes them from coverage with special provisions.

As an example, Mr. Feinman uses a standard homeowner’s insurance policy, commonly referred to as the HO-3. The HO-3 usually has nine different types of exclusion such as the following:

• Damage caused by earth movement;
• Power failure;
• War;
• Nuclear Hazard;
• Loss caused by freezing of a plumbing system;
• Loss caused by settling;
• Loss caused by smog; and/or
• Loss caused by birds, vermin, rodents or insects.

Naturally, an insurance policy that is called an “All Risk” policy but does not actually cover all risks because exclusions preclude coverage for many different types of risks might be at odds with a homeowner’s expectation of coverage. Such a name might be considered by some to be misleading. A policyholder might think this misrepresentation – an “all Risk” policy that does not cover all risks -- could be grounds for a bad faith claim against the insurer. However, as Mr. Feinman explains in his book, courts have allowed insurance companies to sell “All Risk” policies that do not cover all risks under one condition:

What the insurance company gives it can only take away if it does so specifically and unambiguously in the policy. This is an application of the ancient maxim of interpretation know in lawyer’s Latin as contra proferentem, interpreting a documents “against the one who proffers” it: Because the drafter of a document is in the best position to write it in a way that says what it means, he should suffer the consequences if it is not clear. Thus “all risks” includes all risks except to the extent that certain risks have been specifically excluded.

For homeowners shopping for the right policy for their property, it is important to keep in mind that although an “All Risk” policy grants broad coverage, the exclusions take away some of that coverage. It is imperative for homeowners review the proposed policy and all of its exclusions and endorsements so that the homeowner has a fair understanding of what is covered and what is not covered. This might help fend off unpleasant surprises if the homeowner suffers a loss that is not covered.

For more of Mr. Feinman’s evaluation of “All Risk” policies and other important topics that play an important role in today’s insurance industry, please refer to his book Delay Deny Defend.

In the book, he notes a basic truth:

When did you last read the entire commercial general liability policy, commercial property policy or any insurance policy from beginning to end just as a refresher? Rarely does any insurance practitioner, even hard core ones, undertake to read an entire policy; generally there is a spe­cific answer being sought or problem being researched requiring review of only individual parts of the form and its applicable endorsements to develop an answer or opinion.

Insurance professionals realize that answering a coverage question or providing an opinion without first reviewing the policy (and applicable endorsements) is errors and omissions quicksand. But once the complete policy is in-hand, certain “rules” can be applied in reading the form to make finding the needed answer easier and quicker. These are not short­cuts to reading the policy, just pointers to make finding the most correct answer easier.

When all else fails, read the policy language to determine coverage. If you want to learn insurance and be a better adjuster, read Christopher Boggs’ publications.

Here are his rules when reading an insurance policy:

Twelve Rules for Reading an Insurance Policy

1. Ascertain who qualifies as an insured. If the person or entity suffering or causing the loss, injury or damage is not an insured, there is no need to go any further - there is no coverage. Remember, there are four levels of insureds: 1) named insured(s) (first and all listed); 2) extended insureds; 3) automatic insureds; and 4) additional (endorsed) insureds.

2. Annotate the policy form by highlighting the areas changed by an endorsement and list which endorsement changes that section. When reading that part, apply the endorsement wording directly.

3. Compare the forms and endorsements listed on the declarations page with the forms and endorsements attached to make sure the entire policy is available. This includes confirming the edition dates match.

4. Read the Insuring Agreement first to make sure the loss or occurrence is contemplated. This is the broadest the coverage is ever going to be - so start here.

5. After the insuring agreement, read the exclusions. In most liability and special form property policies, coverage is created when not excluded. Treat named peril property policies and the “personal and advertising injury” section of the commercial general liability policy differently, read the list of covered perils (that which causes a loss) first, then the exclusions.

6. Read the exceptions to the exclusions. Exceptions give coverage back in specific amounts. As is discussed in Chapter 2, “Six Reasons the Loss is Excluded,” it’s easier for the carrier to give coverage back by exception than to delete coverage using a long list of exclusions.

7. When the policy refers to another section, read that section immediately.

8. Pay attention to the conjunctions used in a list. “And” is inclusive; “or” is exclusive. If there is a list of five qualifiers, the use of “and” means that all five must be satisfied. “Or” means that if any of the five apply, coverage is granted or excluded (or what ever the list provides).

9. Pay attention to key words and phrases. There are certain key words that must be underlined or highlighted when reading the policy. These words and phrases create, delete or alter coverage and limits (this may not be an all-inclusive list):

• “Not” as in “does not apply to…” or “does not include….” This changes or limits whatever grant or denial of coverage preceded it.

• “Greater than…,” “lesser than…,” “Greater of…,” “lesser of…,” “no more than,” “the most…,” “all” or any other quantifying phrase. “The insured receives the ‘lesser of’…” is a quantifying phrase indicating that of the up coming values, the insured will get the least or lowest amount.

• “Unless,” “except,” “only if…” or “subject to…” each connotes a change in condition, added requirement or an alternative.

• “However” discounts everything before it. This is a qualifying term that creates coverage or condition parameters.

• “Includes,” as the name suggests, is an inclusive term that broadens the provision to which it applies.

• “Must” and “regardless.” There is no alternative and surrounding circumstances are of no consideration in meeting the requirement.

• “First” is an order of sequence term. Some policy provisions list the order of events or actions. Particular attention must be given to the order of events prescribed by these sequencing terms.

10. Read and understand the definitions of specifically defined terms. The insurance carrier desires to control the meaning of certain words and phrases and does so by specifically defining them in the policy. Such definitions can limit or explain the breadth of protection. Words not defined are given their common, everyday meaning.

11. Understand and make sure all the policy conditions have been met. Failure to meet the policy’s conditions can result in the denial of coverage.

12. Confirm the coverage limits are adequate for the loss.

Since I am sure many of you are running around with last minute errands before Christmas, there is a very appropriate video to this post with a message I hope all of you follow:

Under both dependent property forms listed above, a “leader property” (a.k.a. attraction property) is property not owned, controlled, or operated by an insured. Rather, a “leader property” attracts customers to the insured's business. An example is an anchor store in a mall that attracts patrons who pass by the insured's specialty shop nearby. For instance, smaller stores at a mall may have Leader Property coverage to cover them for the drop off in customer traffic and business that might befall them if the flagship store at the mall - e.g., a Wal-Mart or Nordstrom's - is damaged or destroyed.

While it is clear that ownership or an insurable interest over the leader property (ie. leaseholds) do not trigger contingent business income coverage, it must also be understood that control, use and intent of the “leader property” destroys contingent business income coverage.

In Zurich American Ins. Co., v. ABM Industries Inc., 265 F.Supp.2d 302 (S.D.N.Y. 2003), a janitorial company that held a contract to clean the World Trade Center (“WTC”) submitted a claim to its carrier as a result of the September 11th attacks. ABM was a facility services contractor that provided janitorial, lighting, and engineering services in the common areas of the WTC; provided janitorial services for virtually all of the tenants in the WTC; and operated a call desk through which it provided engineering and lighting services to the WTC tenants.

The trial court rejected ABM’s contention that the WTC itself was a “leader property” under the incorrect assumption that the leader property cannot be located in the same site.

But the Court need not reach this latter issue because it is plain that neither the World Trade Center nor its constituent parts is “leader property” in the “vicinity” of ABM which “attracts business” to ABM, but rather is itself the site and source of the ABM business here at issue. This is not a case, for example, where a related business located near a ballpark might suffer a loss if the ballpark were destroyed. Here, rather, the destruction of the World Trade Center caused loss to ABM's business by destroying the tenanted premises and common areas where ABM supplied its services.

ABM appealed the ruling. While the appellate court affirmed the outcome, it rejected the trial court’s reasoning finding that:

We reject the notion that a property cannot “attract” business to another entity at the same site, or adjacent to it. The district court's refutation of this possibility rests on an overly literal interpretation of the word “attracts.” Economic forces need not act in the same physical fashion as does a magnet attracting metal. Indeed, it was the interconnectedness of the WTC complex that “attracted” its tenants to ABM's services by providing an opportunity for ABM to exploit economies of scale. Zurich American Ins. Co., v. ABM Industries Inc., 397 F.3d 158 (2nd Cir. 2005)

Nonetheless, the court concluded that “leader property” coverage was inappropriate because the insured “operated” the infrastructure of the WTC complex, including the common areas and tenanted premises. Agents and risk managers should carefully analyze the particular nature of the businesses that the insured wishes to schedule as a dependent properties to avoid coverage foreclosure, especially in those cases where the limited form is used as an endorsement.

In practice, it limits the amount the policy will pay to a proportion of total coverage. As an example, assume a homeowner has two insurance policies that specifically cover fire losses. Policy A has a limit of $100,000, and Policy B has a limit of $300,000. If the homeowner suffers a fire loss in the amount of $100,000, Policy A will pay ¼ of the loss ($25,000) and Policy B will pay ¾ of the loss ($75,000).

How would this provision apply to a hurricane loss, which may have components of both wind and flood damage, if the policyholder has both a wind and flood insurance policy? The Florida First District Court of Appeal issued its opinion last week in a case where the trial court inappropriately applied this clause to determine how much the wind insurer was liable for. Citizens Property Ins. Corp. v. Ashe, No. 1D09-1546, 2010 WL 4628915 (Fla. 1st DCA Nov. 17, 2010).

In Ashe, the policyholder had purchased both a flood insurance policy and a wind only policy. The wind only policy, while it provided for coverage from hurricane losses, specifically excluded coverage from storm surge, wave wash, and flood. The wind only policy also had an Other Insurance clause in it, identical to the one above. The insured suffered a total loss to his property and was paid policy limits by the flood insurer. At trial on the wind policy damages, the trial court judge erroneously applied the other insurance clause, despite the facts that neither party had argued for its application and both parties objected to its use.

Regarding the other insurance clause, the First District Court of Appeal said,

“other insurance” exclusions “are applicable when two or more insurance policies are on the same subject matter, risk and interest. The reason for said exclusionary clauses is to avoid double collection, and thereby discourage fraud.” (Citations omitted.) We agree with the parties that the purpose of Citizens' “Other Insurance” provision is to address the situation where an insured has multiple polices that insure the same risk; for example, a wind policy of $200,000 with one carrier and a second $200,000 wind policy with another carrier. It is not applicable when the insured has a wind policy and a flood policy, each covering a different peril.

The appellate court reversed the trial court’s application of the other insurance clause to the facts in this case. The appeal, however, was not limited to the issue of the other insurance clause. The court discussed several other important issues, such as the Total Loss Recovery Rule, the relevance of evidence of other insurance payments for the same loss, and the Collateral Source Rule. We will follow up with analysis of those topics in upcoming posts.

Drew v. Mobile USA Ins. Co., 920 So.2d 832 (Fla 4th DCA 2006), is an example of this situation. The policy contained the following:

9. Our Option. If we give you written notice within 30 days after we receive your signed, sworn proof of loss, we may repair or replace any part of the damaged property with like property.

The Drews contended Mobile USA selected the contractor who apparently did a poor job, but Mobile USA indicated that the Drews were provided a selection of contractors. The Court noted two automobile repair cases Travelers Indemnity Co. v. Parkman, 300 So.2d 284 (Fla. 4th DCA 1974), and Arch Roberts & Co. v. Auto-Owners Insurance Co., 305 So.2d 882 (Fla. 1st DCA 1974), to explain whether Mobile USA could be liable for damages above its policy limits flowing from a breach of its contract to repair. The discussion is significant:

In Travelers, ...The insurance company exercised the right given to it by the policy to make repairs, selected the repair company to do the work, and directed the insureds as to where to take the vehicle to be repaired. The vehicle remained in possession of the repair company for fourteen months until the insurance company paid for the repairs. The insureds sued the insurance company for loss of use of the car during the fourteen months it remained in the possession of the repair company. On appeal, the insurance company argued that, absent a provision in the policy providing coverage for loss of use, such consequential damage is not recoverable in a suit for breach of contract. We disagreed, holding that where the insurer elected to repair, the insured could recover damages for loss of use of the automobile proximately caused by the failure to repair it within a reasonable time, even though there was no coverage in the policy for loss of use. Significantly, this court held that “when the insurer makes its election to repair, that election is binding upon the insured and creates a new contract under which the insurer is bound to restore the vehicle within a reasonable time.” Id. at 285 (emphasis added). Where the insurer breaches this new contract to repair, it becomes liable for the damages proximately caused by this breach. Thus, this court allowed the insureds to recover damages outside of the scope of the policy in their breach of contract claim, even though the insurer was not alleged to have acted in bad faith. See also State Farm Mut. Auto. Ins. Co. v. Dodd, 276 Ala. 410, 162 So.2d 621, 626 (1964) (“It is the general rule that where a policy gives the insurer an election to repair or pay, the exercise of the option to repair converts the original contract into a contract to repair, subject of course to various refinements and exceptions.”). (emphasis added)

The Court held the issue of whether the insurer elected to repair was for the jury to determine. If such an election was made, however, the insurer would have no limit on its liability. These situations arise quite often when insurance field adjusters start mandating how repairs should be made and by whom. When things go wrong, policyholders may want to consider whether the insurer constructively elected to repair.

In Scottsdale Ins. Co. v. Mason Park Properties LP, 249 Fed.Appx. 323, 2007 WL 2710735 (5th Cir. 2007), the commercial tenant’s insurer brought action against the tenant, landlord, and tenant’s insurance agent, seeking a declaratory judgment regarding the rights to proceeds of tenant’s commercial property insurance policy for property losses resulting from a fire at a leased restaurant. Mason Park Properties LP (“Mason Park”) was the owner of the building in which Taste of Katy was a tenant. Taste of Katy’s lease agreement required it to secure insurance designating the landlord as a loss payee for property insurance and as an additional insured for commercial general liability insurance. On July 12, 2004, a certificate of insurance was issued showing that the tenant had $1,000,000 worth of commercial general liability coverage, $100,000 worth of property damage coverage, and it listed Mason Park as a “certificate holder.”

On November 1, 2004, Taste of Katy made a claim in the amount of the policy limits for losses due to a fire. Seemingly ignoring the certificate of insurance listing Mason Park as a “certificate holder,” the United States Court of Appeals for the Fifth Circuit (Texas) affirmed the district court’s decision that the landlord was not covered under the property coverage portion of the tenant’s policy. The Fifth Circuit found that Mason Park was not covered because it was not properly listed under the loss payable provision:

The loss payable provision, which modified the property coverage part, originally stated that the name and address of the loss payee was ‘to follow.’ Nothing in the loss payable provision or anywhere else gave [the insurer] notice that Mason Park was the intended loss payee.

The Fifth Circuit concluded Mason Park was not entitled to the insurance proceeds because:

[N]othing in the property coverage part indicates that Mason Park is a loss payee, an additional insured, or otherwise has coverage, [therefore] it cannot recover under the property coverage part.

As Scottsdale Ins. Co. v. Mason Park Properties, LP demonstrates, merely being a “certificate holder” will not do; the policy must explicitly state somewhere that you, as the landlord, are entitled to any insurance proceeds. So if you’re a commercial landlord, make sure that your tenants list you as a “loss payee,” or something similar, in their insurance policies. Otherwise, you might find yourself without any rights to the insurance proceeds should your property experience a loss.

The significant and sad facts of this case are as follows:

Mrs. Blake's first language is German and she speaks English as a second language. She was the only listed named insured on the policy...Mr. Blake is not expressly named in the policy. Her home was burglarized by an unknown assailant on November 4, 2005. She furnished First Home with timely notice of loss, proof of claim and otherwise performed all conditions precedent to coverage. First Home requested an EUO and Mrs. Blake attended the EUO...During the EUO, the examiner asked her, “Who lives in the home with you?” Mrs. Blake replied, “Me, my husband and my daughter.”

This non-date specific question appears to be the only question that asks about the status of who was living at the home. Nothing in the answer suggested when precisely Mr. Blake lived with Mrs. Blake and her daughter. As Mr. Blake is not listed on the policy, it would have been highly probative and relevant to ask about the time period that Mr. Blake resided in the home. After the EUO concluded, First Home proceeded to request the EUO of Mr. Blake. The first request was addressed to Mrs. Blake's attorney Ryan Ratliff on July 27, 2006. Mr. Ratliff did not forward this notice to Mr. Blake, as he did not represent him. The second request was sent directly to the home address that is the subject of the policy, certified mail return receipt requested. First Home has not come forth with a return receipt indicating that Mr. Blake ever signed for the letter.

Mrs. Blake filed an affidavit in opposition to First Home's summary judgment motion, pointing out her language problem and clarifying her testimony during the EUO by bringing forth a certified copy of a permanent domestic violence injunction...It ordered Karl Blake could “not go to, in, or within 500 feet” of Mrs. Blake's residence....
...

Mrs. Blake argued that Mr. Blake was not an insured. More importantly, counsel for Mrs. Blake argued that “[t]he noncooperative spouse cannot hold a cooperative spouse's claim hostage.” To this point, he cited...case law...that “the refusal by insured's husband to submit to an examination under oath did not operate to prevent insured from recovering for loss of her property . . . but merely prevented husband from recovering benefits or any loss he might have suffered.” First Home conceded that Mr. Blake was not a named insured, but was an “additional insured.” Counsel for Mrs. Blake brought to the trial court's attention the “innocent co-insured” exception.

Notwithstanding, the trial court granted summary judgment. It was concerned that Mrs. Blake's failure to advise First Home, that she and her husband had separated, prejudiced First Home. The trial court further felt that First Home could have attempted to locate and serve Mr. Blake, if it had been aware that he was no longer living in the home. This appeal followed."

Interestingly, the Court found that the husband was "an insured" under the policy at the time of the loss:

[W]e find that Mr. Blake was an additional insured on the date of incident. Seitlin & Co. v. Phoenix Ins. Co., 650 So. 2d 624 (Fla. 3d DCA 1994) (holding that university student living at off-campus apartment was an additional insured because he had not permanently left his parent's home). We also find Mr. Blake ceased to be an additional insured, as of the date he permanently moved out of the home. Allstate Ins. Co. v. Fulton, 345 So. 2d 854, 855 (Fla. 3d DCA 1977) (“[O]nce she ceased to be a resident spouse ‘of the Named Insured's household,' she ceased to be an insured.”) While he is no longer currently an insured of First Home for any losses that arose after he left the home permanently, that does not mean he is no longer covered by First Home with respect to the loss that occurred on November 24, 2005. Therefore, we hold that Mr. Blake was an insured, and was required to attend an EUO.... (emphasis added)

The hurdle and issue for the innocent spouse is whether the failure of another spouse to appear for an examination will prevent recovery to the innocent spouse. The Court ruled for the innocent spouse in this case, reasoning:

We find that First Home's policy only mandated that at least one insured attend an EUO, not that every insured attend an EUO to satisfy a condition precedent to coverage for the claim of each insured. First Home could have required the joint attendance of all insured in its policy language, but did not expressly do so. See USAA Cas. Ins. Co. v. Gordon, 707 So. 2d 1185, 1186 (Fla. 4th DCA 1998) (court found that the use of the term “any insured” was unambiguous as compared to the vague term “the insured”). If properly worded, certain policy terms can expressly create joint obligations and defeat recovery by an innocent co-insured. Kattom v. New Hampshire Indem. Co., 968 So. 2d 602, 605 (Fla. 2d DCA 2007). Nonetheless, where a policy does not express whether the obligation to attend an EUO is joint or several, the ambiguity should be resolved as requiring the obligations and coverage to apply severally. Overton v. Progressive Ins. Co., 585 So. 2d 445 (Fla. 4th DCA 1991) (“We conclude that the policy must be interpreted to provide several rather than joint coverage and that appellant, as an innocent insured, is to be afforded coverage under the Progressive policy.”) Therefore, we hold that First Home was free to deny Mr. Blake's claim because he failed to attend an EUO, but should have covered Mrs. Blake based on the language of its own policy. (emphasis added)

This is an issue that is not going away. Insurance companies will write policies requiring joint obligations, which present an opportunity for one person involved to breach the contract and threaten chances of recovery for an insured who fulfills all the required obligations. When emotions run high,  "resident relatives" who are "omnibus policyholders" sometimes act in spite to the detriment of all involved. It is tough enough to insure against perils of God that cause misfortune and collect from an insurer. Making an honest and innocent insurance customer dependent on third parties, who often don't care and may even hate the policyholder, adds another uncertain variable to recovery.

The 1985 case of Farmer’s Mutual Protective Association of Texas v. Wright, concerned an elderly couple, the Wrights, who owned two homes, one in the town of Rotan (the “Rotan house”) and another about fourteen miles outside of Rotan (the “country house”). The elderly couple lived in the country house until January 1984, when they moved to the Rotan house after they could not find a tenant for it. A fire destroyed the country house in September 1984. After the fire, the elderly couple attempted to recover $40,000 under their fire insurance policy on the country house, but the insurer denied liability based upon the “unoccupied property” clause of the policy.  The clause stated that insurance on an occupied dwelling was automatically terminated six (6) months after the dwelling became unoccupied, unless the insureds notified the insurer and paid a an additional amount to cover the unoccupied property.

Citing Texas Supreme Court precedent, the Court in Wright set forth the following definitions:

A house is ‘occupied’ when human beings habitually live in it as a place of abode; a house is unoccupied when it ceases to be used for living purposes or as a customary place of human habitation.

In Wright, the parties disagreed over whether two houses can be “occupied” at the same time. Finding in favor of the insureds, the Court affirmed Texas precedent by ruling that “[i]n ascertaining the meaning of the words ‘vacant and unoccupied,’ they should not be taken in a technical and narrow sense, but should be taken in their ordinary sense, as commonly used and understood, and, if the sense in which they are used is uncertain, they should be construed more favorably to the insured.”

The Court concluded that there was evidence that the country house was occupied because it was used for living purposes, used as a place of abode, and it was the customary place for human habitation. Mr. Wright went the country house every day to check on and feed their cattle, he took naps there, polished the furniture, kept most of the utilities running, and maintained the lawn twice each month. Moreover, the Wrights would have moved back to the country,if they had found a tenant for the Rotan house. Because of this evidence, the Court of Appeals affirmed the trial court’s implied finding that the country house was occupied at the time it was destroyed by fire and affirmed the trial court’s judgment in favor of the insureds.

The issue of whether a total cessation or a mere slowdown in productivity is required to trigger business interruption coverage is one of those questions that will most likely be defined in the policy. If not, courts will be given an opportunity to answer the question, which could lead to undesired results for either party.

In Keetech v. Mut. Of Enumclaw Ins. Co., 831 P.2d 784 (Div. 3 1992), a hotel was covered in ash after Mount St. Helen erupted. Although the hotel sustained “physical damage” as a result of the ash, the hotel remained open. Some of this damage, such as the destroyed plants and shrubs, were not replanted until six months later. Because of the ash fall, and the succeeding ash blowing onto the premises, the physical appearance and physical attractiveness of the motel was damaged. Although the hotel remained open and operated at all times, it suffered a decrease in hotel occupancy and made a claim for business income loss. The carrier denied the claim and suit followed.

The policy in question stated, in part:

[T]he actual loss sustained by the insured resulting directly from necessary interruption of business ... for only such length of time as would be required with the exercise of due diligence and dispatch to rebuild, repair or replace such part of the property herein described as has been damaged or destroyed ... Due consideration shall be given to the continuation of normal charges and expenses, ... to the extent necessary to resume operations of the insured with the same quality of service which existed immediately preceding the loss; and

....

4. Resumption of Operations: It is a condition of this insurance that if the insured could reduce the loss resulting from the interruption of business:

a. by complete or partial resumption of operation of the property herein described, whether damaged or not, ...

such reduction shall be taken into account in arriving at the amount of loss hereunder.

The Keetech court denied recovery under the cited provision, holding that “the purpose of business interruption insurance is to indemnify for loss due to inability to continue to use specified premises. Here, [the insured] did not suspend its business activity; its business was not interrupted as provided for in the loss of earnings endorsement.”

Although many courts follow the “total cessation” approach in Keetech, many others will allow recovery under a “slow down” theory, depending on the language of the policy at issue. For example, in American Medical Imaging Corp., v. St. Paul Fire and Marine Ins. Co., 949 F.2d 690 (3rd Cir. 1991), the court allowed recovery even though business continued at less than normal level.

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

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

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

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

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

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

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

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

In Malley, the homeowner had a standard Texas Dwelling Policy Form—3, insuring the house he owned in Beaumont, Texas. The house was damaged by plumbing leaks in the foundation during a 1999 freeze. Allstate denied Plaintiff’s subsequent mold claim, asserting that the policy contained an exclusion for mold damage. Plaintiff asserted that there was coverage under the “ensuing loss” provision, because it resulted from a covered event.

The policy stated:

We do not cover loss caused by:
.....
(2) rust, rot, mold or other fungi.
.....
We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of 349*349 glass which is part of the building if the loss would otherwise be covered under this policy.

The District Court noted that the Texas Supreme Court had not the construed “ensuing loss” provision in a policy like the one in this case, so it had to make an educated guess as to how the Texas Supreme Court would rule. However, the District Court pointed out that Texas state intermediate courts have interpreted “to ensue” as meaning “to follow as a consequence in chronological succession; to result, as an ensuing conclusion or effect.” Citing another Texas case, the Court stated that:

Ensuing loss caused by water damage refers to water damage which is the result, rather than the cause, of settling, cracking, bulging, shrinkage, or expansion of foundations, walls floors, [and] ceiling.

Applying this analysis, the Court concluded that mold damage resulting from earlier water damage, as claimed by the Plaintiff, would not be covered. “The ‘ensuing loss’ caused by water damage would refer to water damage which is the result, not the cause, of mold damage.”

The Court decided that if it were to interpret the “ensuing loss” provision so as to allow mold coverage under the circumstances in this case, it would “very nearly destroy the exclusions.” And an interpretation rendering the exclusionary clause inoperative makes “no sense.”

In short, according to the U.S. District Court for the Eastern District of Texas, if you have a mold exclusion in your insurance policy, an “ensuing loss” provision will not negate that exclusion.

Consolidated Companies, Inc. (“Conco”), a food and food-related products distributor, sustained damages to one of its warehouses and equipment as a result of Hurricane Katrina. Conco was able to resume partial operations within ten (10) days of the hurricane, however, it took the company 15 months to resume its pre-loss operations. During those 15 months, Conco earned $205,840,489 in revenues and incurred $205,561,483 in expenses, netting a mere $279,006.

Lexington advanced $3 million under the policy and offered an additional $247,070 in final payment of the claim. Conco rejected the additional $247,070 and filed suit sounding in breach of contract and bad-faith alleging it had a business interruption loss in excess of $19 million (of which $12,308,522 were charges and expenses).

After a trial, the jury awarded $19,586,239 in business interruption, $2.5 million in bad faith damages, and an additional $5,365,797.50 in statutory penalties. Lexington appealed on several grounds, including whether the trial court erred in not instructing the jury to offset the charges and expenses ($12,308,522 ) from the calculated net income. Lexington prevailed, and the award on the business loss was therefore adjusted.

At issue before the Court was the following policy language:

If such loss occurs during the term of this policy, it shall be adjusted on the basis of the actual loss sustained by the Insured, during the period of restoration, consisting of the net profit (or loss) which is thereby prevented from being earned and of all charges and expenses (excluding ordinary payroll), but only to the extent that they must necessarily continue during the interruption of business, and only to the extent to which they would have been incurred had no loss occurred.

* * * *

1) RESUMPTION OF OPERATIONS: It is a condition of this insurance that if the insured could reduce the loss resulting from the interruption of business,

(a) by a complete or partial resumption of operations, or

(b) by making use of other available stock, merchandise or location

such reduction will be taken into account in arriving at the amount of loss hereunder, but only to the extent that the business interruption loss covered under this policy is thereby reduced.

As defined in the policy, the “actual loss” consists of the net profit or loss which the business interruption prevents from being earned. The term “charges and expenses” is further defined as expenses that would have been incurred without the loss and have to continue during the business interruption.

Conco argued that the charges and expenses incurred during the period of restoration are recoverable in addition to the lost profits, as calculated under the “actual loss” provision. The trial court agreed with Conco by finding that the “actual loss” provision was ambiguous and resolved the issue in favor of the insured. However, the appellate court disagreed, finding that the “Resumption of Operations” subparagraph resolved the question in favor of Lexington.

In an acrobatic effort to make a difficult issue simple, the Court wrote:

As a condition of coverage, operations had to be resumed “if the insured could reduce the loss resulting from the interruption of business” by such a resumption. The policy states that “such reduction will be taken into account in arriving at the amount of loss hereunder, but only to the extent that the business interruption loss covered under this policy is thereby reduced.”

This clause does not elaborate on what the “loss resulting from the interruption of business” means. Meaning is found in the general section immediately before the “Resumption of Operations” subparagraph. There, “actual loss” from an interruption of business is said to consist of the net profit that the interruption prevented the insured from earning plus “all charges and expenses (excluding ordinary payroll), but only to the extent that they must necessarily continue during the interruption of business, and only to the extent to which they would have been incurred had no loss occurred.” Three paragraphs later, the policy addresses the effect of the insured's resuming operations: “if the insured could reduce the loss resulting from this interruption of business ... by a complete or partial resumption of operations ... such reduction will be taken into account in arriving at the amount of loss.” (emphasis added). This is the same “loss” that is defined as being expected net profit plus charges and expenses. There is no ambiguity.

Therefore, when a partial resumption in operations reduces the “actual loss,” i.e., anticipatable profits and unavoidable costs, so substantially as to create some profit, all charges and expenses have, by definition, been covered by income. The only recovery in such an event is for the diminished profit.

Taking the actual dollar amounts presented in this case, we repeat that Conco earned $205,840,489 in revenues and incurred $205,561,483 in expenses for a net profit of $279,006. The charges and expenses for which the policy would pay had there been no resumption of operations was shown to be $12,308,522. As the policy requires, those expenses are ones that “necessarily continue during the interruption of business, and only to the extent to which they would have been incurred had no loss occurred.” Thus, they are not independent of the costs that are incurred during usual operations, but are a subset of them. Consequently, the roughly $12 million in expenses must be part of the $205 million in expenses that were incurred during resumed operations. All expenses were recouped from the income of the business and are not a “loss” to be compensated under the policy.

It is hard to understand how $12 million can just disappear in a few sentences, but insurance law abhors windfalls on any side. Unfortunately, since the “actual loss” was reduced by $12 million, the court of appeals also reduced the bad-faith damages, because the jury based its bad-faith findings mostly on the failure to pay the $12 million. 

For a copy of the complete opinion, click here.

Fountain Powerboat v. Reliance Ins. Co., 119 F. Supp. 2d 552 (E.D. N.C. 2000), is illustrative of the value of this type of coverage. Fountain manufactured, distributed and sold boats and boating equipment out of a facility in Washington, N.C. In 1999 Hurricane Floyd dumped record-setting rain fall over the eastern part of North Carolina. After the storm passed, the only roads leading to the Fountain facility were closed for seven days. For three days Fountain used large trucks to pick up workers from various “pick-up points” and transport them to the facility. As a result of displacement caused by the floods, production at the Fountain facility fell to 33 percent of full capacity.

Reliance paid nearly $1,000,000 for certain claims but partially denied the claim for ingress/egress coverage asserting that without property damage, the insured could not recover under this provision and that there was no actual impairment to access since Fountain was able to drive its workers over the flooded and eroded roads for three days.

Fountain filed suit seeking appraisal, but Reliance refused and asked the court to interpret the following provision:

Loss of Ingress or Egress: This policy covers loss sustained during the period of time when, as a direct result of a peril not excluded, ingress to or egress from real and personal property not excluded hereunder, is thereby prevented.

The court held as follows:

The plain meaning of this language indicates an agreement between the parties that the contract for insurance cover any business interruption caused by loss by any peril not excluded. A “loss” is not predicated on physical damage but is one category of recovery along with damage and destruction as indicated by the use of the alternative coordinating conjunction “or.” Flooding due to Hurricane Floyd is exactly the type of peril this business interruption loss was drafted to insure against.

Furthermore, Reliance was aware of the location of the Fountain facility and was aware that the facility had a limited access. The court can only conclude that the parties intended that the policy would provide coverage not only when the property itself was inaccessible, but also when the only route to the Facility caused the property to be inaccessible. The court's conclusion that no physical loss is required to trigger business interruption coverage is further bolstered by the parties' inclusion of the following provision:

5. Interruption by Civil or Military Authority: This policy is extended to cover the loss sustained during the period of time when, as a direct result of a peril not excluded, access to real or personal property is prohibited by order of civil or military authority.

This provision immediately precedes the loss of ingress/egress provision. Neither provision requires physical loss, but merely covers loss sustained due to lack of access to the property. Therefore, the court finds that no requirement for physical loss to the property is required under the contract of insurance in order to trigger business interruption coverage under the ingress/egress clause.

Interestingly, the court found that the length of time for which loss of ingress/egress may be claimed is the length of time to restore Fountain's business to the condition that would have existed had no loss of ingress/egress occurred. The court also found that the insured’s efforts to pick up its employees and drive them to work were extraordinary (since they were driving over flooded and closed roads) and that the ingress/egress provision related only to reasonable access to the property.

Not all ingress/egress provisions are as expansive as the one interpreted in Fountain Powerboat, as most forms will limit the period of recovery to a few weeks. It is highly recommended that any business located in an isolated or hard to access area consider reviewing the ingress/egress provision of its policy to ensure that adequate coverage is provided.

In Bayou City Prop. v. American Econ. Ins. Co., No. 09-1720, 2010 U.S. Dist. LEXIS 51753 (S.D. Tex., May 25, 2010), the Plaintiff had purchased coverage for employee dishonesty to cover instances of theft. On April 3, 2008, the Plaintiff was a victim of theft and vandalism: computer files were permanently deleted and tangible items were stolen, but there were no signs of forced entry. A property manager for the Plaintiff was the last person seen in the office before the theft and he did not return to work after the night of the incident. Plaintiff concluded that the property manager was responsible for the theft.

Although the Plaintiff purchased employee dishonesty coverage for instances of theft, that coverage did not extend to independent contractors. The parties agreed that the property manager/thief was an independent contractor. Independent contractors fell under the policy’s exclusion for general dishonesty. The court noted the policy’s exclusion for general dishonesty “exclude[d] coverage for dishonest acts by someone who was entrusted with the property affected by the dishonesty. Coverage, thus, depends on whether [the property manager] was entrusted with [the Plaintiff’s] office property.”

Defendants argued that the Plaintiff entrusted the property manager as evidenced by the Plaintiff giving the property manager the keys to the office building and passwords to the computers. Plaintiff argued that entrustment is akin to a bailment, which it claimed requires exclusive possession. Plaintiff argued that the office was not entrusted to the property manager because several people had keys and passwords.

The Court quickly dismissed the Plaintiff’s argument, concluding that the law recognizes sole and joint bailments. The Court then went on to define entrustment as “confid[ing] something to another something of significance – an authority or object – for one’s own purposes or coincident purposes with the other person. It can be limited or limitless.”

The Court concluded that by giving the property manager access to and control over the office, the Plaintiff “commended its contents to [the property manager] for the joint work of [the Plaintiff] and [the property manager]. That others were similarly entrusted does not negate [the Plaintiff’s] entrustment of [the property manager].” Because the Court determined that the Plaintiff had entrusted the property manager with its property, any theft by the property manager was not covered under the policy.

If the Plaintiff had hired someone permanently to manage the property, instead of relying on an independent contractor to do the job, this outcome might have been avoided.

[Insurer] will pay necessary Extra Expense you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property at the described premises ... caused by or resulting from a Covered Cause of Loss.

Extra Expense means expense incurred:

(1) To avoid or minimize the suspension of business and to continue ‘operations':

(a) At the described premises ...

(2) To minimize the suspension of business if you cannot continue ‘operations.’

(3) (a) To repair or replace any property ...

to the extent it reduces the amount of loss that otherwise would have been payable under this Additional Coverage or Additional Coverage f., Business Income ...

After reading the extra expense provision, it is ascertainable that the timing of when an expense is incurred is just as important as the fact that it is incurred at all. The provision expressly states that extra expense is limited to those costs actually incurred by the insured itself during a period of restoration. However, most policies do not define the term “incur”. As such, courts are often required to interpret the plain meaning of this provision and a set of facts.

Chatham v. Dann Insurance, 812 N.E. 2d 483 (Ill. App. Ct. 2004) provides a detailed analysis on this issue. Chatham ran a medical equipment sterilization facility. After an explosion, the facility was shut for seven months. During that time, Chatham could not sterilize equipment for one of its main customers. Pursuant to Chatham’s contract with its main customer, Chatham was obligated to arrange for alternate sterilization and pay the cost of shipping the customer’s unsterilized goods to the alternate facilities. The contract, however, did not require Chatham to pay for shipping the sterilized equipment back to its customers and Chatham never did pay for such “outbound freight” costs. Chatham submitted a claim that included those return shipping costs that its main customer incurred and sought coverage under their policy extra expense provisions.

The carrier paid for the reconstruction of the facility and for $1MM of “inbound freight” costs as extra expenses claimed by the insured as a result of the explosion, but it refused to pay an additional $1MM in return shipping costs incurred by Chatham’s biggest customer. Chatham filed suit.

Although the carrier had made a partial payment for extra expenses, the court found that the carrier had not waived its coverage defense and held that the costs of shipping products from an insured's alternate facilities to the insured's customers were not covered, reasoning that Chatham had not itself incurred those expenses:

We are unable to find any ambiguity in the contract language regarding extra expenses.[…] This commonly understood meaning encompasses expenses that the named and additional insureds to the policy, Chatham and SSV, were required to incur during the reconstruction of the sterilization facilities. It does not encompass expenses that the insureds may have wanted to incur on a gratuitous or voluntary basis, which would have been the opposite of “necessary.” It also does not encompass expenses that other, nonparties to the contract were required to incur during the facility reconstruction period. The only party required to pay for the cost of shipping [the customer’s] sterilized products away from the alternate sterilization facilities was [the customer’s] itself, not Chatham or SSV.

The court further defined the meaning of incurred:

“Incur” is another term that was not defined in the contract, but it has a plain, ordinary, and popular meaning of “to become liable or subject to through one's own action; [to] bring or take upon oneself.” Random House Webster's Unabridged Dictionary 969 (1998). Chatham never became liable or subject to the expense of [the customer’s] outbound freight. [Its customer] did.

In conclusion, under the standard extra expense provision, although certain extra expenses may be a direct consequence of a loss, they will not necessarily be covered unless the named insured incurs it on its own -- not through a third party.

Before the change in Citizens’ policy, analysis of a requirement for an examination focused on the word “insured.” The insured is usually required to submit to an examination under oath when demanded. The term insured is usually defined in the policy, and this helps lawyers to determine who is required to give an EUO. A look at the case law shows that arguments have been made about how far the definition of insured can stretch with respect to commercial policies and commercial- residential policies. This debate has been going on for decades.

Recently, in Florida Gaming Corp. v. Affiliated FM Ins. Co., 502 F. Supp. 2d 1257 ( S.D. Fla. 2007), the U.S. District Court for the Southern District of Florida addressed issues regarding who is required to give an examination under oath under the Affiliated policy issued to Florida Gaming. It is important to remember that in Florida Gaming, the policy language was different than the policy considered in this blog. The facts of this case, like all cases, are unique.

In Florida Gaming, the Court considered who should be required to give an EUO. The Vice President of the company gave a lengthy EUO but could not answer all questions. He admitted that he had no personal knowledge relating to the amount of loss and relied on the public adjuster’s analysis and the contractor, who was hired by the public adjuster, to estimate the damages. The insurance company requested that the contractor be subject to an EUO. Based upon the policy and the facts, the Court declined the request, stating:

Affiliated argues that Florida Gaming must submit Al Paxton to an examination under oath because PCA performed the analysis upon which Florida Gaming has relied in its sworn proof of loss. Florida Gaming responds that the policy requires only that “the insured” submit to examinations under oath. The Court agrees with Florida Gaming, that given the language of the policy, which authorized the examination of “the insured,” an examination of the insured's adjuster (or its agents or representatives) does not appear to have been contemplated. The Court therefore applies the rule requiring that the policy be interpreted in favor of the insured, and finds as a matter of law that Al Paxton is not required to submit to an examination under oath.

The Court’s explains is important; the obligations of those involved were determined by the policy provisions and what was contemplated by the wording of the policy at the time of drafting. This is how insurance policies and other contracts are routinely interpreted, and it provides some guidance in interpreting the new Citizens policy.

Does the exact wording of the provision matter?

Yes.

In Florida Gaming, the Court also explained that when a policy of insurance is ambiguous, the ambiguity is resolved in favor of the insured. This may be an angle used to help public adjusters determine their responsibility with the Citizens policy. The language requesting the EUO does not say “public insurance adjuster,” it says “anyone you hire in connection with your claim.” Perhaps there is enough ambiguity here for a court to agree the policy is unclear and overly burdensome.

What about the policyholder?

One of the common themes in the comments and the discussion about this provision relates to the policyholder. Suppose the insured has a loss and has problems or a complicated claim. The policyholder needs help and hires a public adjuster. The public adjuster’s contract is signed and the claim is presented to Citizens. Citizens demands examinations under oath and lawyers are hired. There is a dispute concerning the obligations of all involved, and the matter ends up in court. The matter is one of many pending on a very full docket. Meanwhile, the insured has to wait just to figure out what is required under the policy. The insured’s home or business is in limbo and the public adjuster is spending more and more time attempting to figure out how to help the client.

While the purpose of this blog is to have a discussion and evaluation of this issue, I also want to remind everyone that examinations under oath must be demanded. If there is no demand, there is no issue. Until an EUO of a public adjuster is demanded and the matter litigated, we will have no definitive guidance on the issue. While no one can predict the future and changes are always happening with property insurance, everyone should understand the policy provisions and be aware of new policy language that could affect your job and your clients’ claims. In the meantime, taking extra care to be prompt in communications and forthcoming with the claim presentation may save unnecessary headaches later.

The provision reads:

As often as we reasonably require:
1. Show us the damaged property
2. Provide us with records and documents we request and permit us to make copies
3. You or any "insured" under this policy MUST:
a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;
4. If you are an association, corporation, or other entity; any members, officers, directors, partners or similar representatives of the association must:
a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;
5. Anyone you hire in connection with your claim and anyone insured under this policy other than an "insured" in (3) or (4) above, must:
a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;

Keeping the discussion limited to public adjusters for this post, these are the questions I have received most frequently:

1. What happens if the PA refuses?
2. Is the PA always required to give an EUO?
3. Can the PA fill the shoes of the policyholder and give the only EUO?
4. How can the statements given by the PA during an EUO change a claim decision?

The answer is the same for each question. It depends. The first thing to consider is the policy. At this time, the Citizens form seems to be unique. The entire policy should be reviewed by a qualified lawyer to determine the obligations of the parties.

Generally, the parties to an insurance contract are the insurer and the insured. The public adjuster is not a party to the contract, however, the PA is paid based upon the claim and has an interest. In fact, the first thing most public adjusters do is notify the insurance company of their involvement and request to be listed as payee on the settlement proceeds. The assignment of the claim payments and actual payment afforded to the PA is done pursuant to another contract; the contract entered into between the policyholder and the public adjusting firm. The contract with the public adjuster may say something like this…

In consideration of the services rendered by XYZ Public Adjusters, we hereby assign and agree to pay XYZ Public Adjusters a certain percentage___ of the funds when recovered in connection with this claim.

The insurance policy will likely have three more important sections to consider. The first is the definition section. Under the definitions, the term “you” should be defined. Typically, the “you” in an insurance policy is the insured and those who are bound to perform the obligations under the policy. The “loss payment” clause should be considered too. Does the insurance policy state what has to happen for the payment to be made? This section may outline what each party needs to do for payment to be issued. Also, the concealment and fraud provisions should be considered to determine if and how the testimony of a PA might affect a policyholder’s claim.

After looking at the policy, the claim needs to be evaluated. The status of a claim can make all the difference in how an EUO demand is handled. One thing to look for is whether the demand for the EUO is timely. Did the insurance company waive the right to take the EUO? Has the claim been denied or has there been a material breach of the contract by the carrier? While each claim is different and providing claim information to the insurance company is necessary, these questions should be answered by a trained lawyer. Depending on the case, sometimes providing an EUO (even if there was waiver) may help a claim to be resolved more quickly and leave the insurance company one less defense to the payment. However, an EUO should not be given by anyone without a lawyer. The insurance company has hired a lawyer to represent it at the EUO and a policyholder should always retain counsel too. An EUO is not an opportunity for a policyholder to try out his or her Matlock skills. Remember, even lawyers hire lawyers and doctors see doctors.

When the policy is originally issued, the average policyholder did not consider provisions that may affect non-parties to the contract, nor did they consider who would end up being paid insurance benefits from a claim for damage. Thus, who is the PA in connection with the contract? Is the PA a third party beneficiary or a non-party? A public adjuster involved in a claim typically should not be considered an intended third-party beneficiary. However, the public adjuster receives a benefit only if obligations of the contract are carried out by both parties. If the policy in total supports such a requirement, the public adjuster may have an obligation to sit for an examination under oath. Again, this will depend on the specific policy language regarding EUO and the contract with the policyholder. Remember, looking at one portion of a policy without considering the whole contract is similar to applying sunscreen to just one arm and assuming you won’t get burned after a day at the beach.

This post will continue on Monday. In the meantime, if you have given an EUO and having been dealing with similar issues and would like to share your experience, please send me an email at nvinson@merlinlawgroup.com, call directly at 813-415-8758, or post your comment here.

Chip Merlin, founder and president of Tampa-based Merlin Law Group, fights insurance companies for a living. Chip likens the Deepwater Horizon disaster to one of those best-selling thrillers where you know who the bad guy is from Page 1 but you keep reading for the ironic twists and turns that follow.

Ironic insurance twist No. 1: Despite the acid-reflux-inducing news footage, the raw crude oil from the BP spill may not fall under the standard insurance definition of a "pollutant," and hence may not be covered under the $10,000 standard pollution cleanup provisions. Chip explains the subtleties:

"As a naturally occurring substance that hasn't been refined at all, crude oil itself might not be a pollutant under the policy," Merlin says. "A lot of the attorneys in my firm say it might not."

Ironic twist No. 2: Homeowners may receive some cleanup assistance under standard insurance coverage against explosions if it is determined that the explosion that sank the Deepwater Horizon rig directly led to the spill.


Ironic twist No. 3: Unless the spill physically smears your house, your homeowners insurance likely won’t cover it. Many policies define “property not covered” to include “roadways, other paved surfaces, land and foundations.” Direct damage to insured property is usually required to trigger coverage.

“Because the property policies don’t cover land, the insurance companies are going to argue that there is only damage to the land and we only cover damage to structures,” Merlin says.

Ironic twist No. 4: Should the sticky stuff be washed ashore by a hurricane, your insurance company would likely deny claims involving storm surge, which courts have ruled fall under flood insurance.

“The insurance industry is going to argue that it is excluded because the damage is the result of storm surge, which has been held to be excluded every single time it pops up,” Chip predicts.

Ironic twist No. 5: Owners of beach rentals may not be able to recover business insurance losses.

“Most lost income claims on a rental property require some property damage,” Merlin says. “Most insurers are going to deny those claims based upon the fact that they do not involve property damage; the oil is just floating out there and people are just canceling reservations.”

Residential and commercial insurers will likely seek reimbursement via subrogation from BP’s insurers for any oil-related claims. Federal and state agencies are expected to do likewise, as well as tap the Oil Spill Liability Trust Fund, which taxes the petroleum industry to help clean up its spills.

Whether homeowners insurance will absorb the oil spill remains to be seen. Merlin predicts years of litigation ahead as legions of claimants and scores of class action suits wash up on BP’s doorstep.

That is exactly what I concluded this morning in The BP Oil Spill Causes an Epidemic of Claims. However, every homeowner and businessowner should first read the language of their policy. Commercial policies have various coverages that may provide benefits, including event coverage, contingent income loss coverage, environmental coverage, debris coverage, trade loss coverage and supply chain coverage. Policy wording is crucial when analyzing these losses under first party insurance policies.

This is the Examination Under Oath (EUO) requirement in the Citizens’ policy. The highlighted portion, lines 5 a-b, are new and controversial part:

FORM CIT HO-01 10

As often as we reasonably require:

1. Show us the damaged property

2. Provide us with records and documents we request and permit us to make copies

3. You or any "insured" under this policy MUST:

a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;

4. If you are an association, corporation, or other entity; any members, officers, directors, partners or similar representatives of the association must:

a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured"; and
b. Sign the same;

5. Anyone you hire in connection with your claim and anyone insured under this policy other than an "insured" in (3) or (4) above, must:

a. Submit to examinations under oath and recorded statements, while not in the presence of any other "insured;"and
b. Sign the same;

Generally, insurance policies contain a requirement that the insured must give both a recorded statement and an Examination Under Oath (EUO) in the “Conditions” section of a policy. A recorded statement may be used to gather information by insurance company at the onset of the claim. An EUO is a more in-depth interrogation by a lawyer for the insurance company. The requirements of policyholders in connection with an EUO depend on the policy language. Many policies require insureds to sit for an EUO, sign the recorded transcription, and give the EUO while not in the presence of any other insured. Essentially, an attorney for the insurance company asks a long series of questions while a court reporter records the whole thing. An EUO is more similar to a deposition than a simple recorded statement, except that the EUO is governed by the rules explained in the policy and not the Rules of Civil Procedure. EUOs are adversarial. Now, at least for Citizens claims, it seems public adjusters are subject to the same requirements.

The insurance company has many other ways to learn about a claim and the public adjuster’s involvement and evaluation of it. This series of posts will consider the implications of Citizens’ new policy language and will discuss what is happening now on the front lines.

-Nicole Vinson

At its very basic form, the standard ISO CP 00 30 "Business Income (and Extra Expense) Coverage Form" states that:

"period of restoration" does not include any increased period due to the enforcement of any ordinance or law that regulates the construction, use or repair, or requires the tearing down of any property.

Most business policies also have a standard ISO CP 00 10 “Building and Property Coverage Form,” which will provide coverage for the increased costs incurred to comply with the enforcement of new building codes up to a cap or limit. However, the delay in repairs or replacement caused by complying with the required forms may still not be covered by this basic form.

Large-scale business owners, should speak with their brokers about company or manuscript forms that provide not only complete coverage for the increased costs, (i.e., not limited to a percentage), but will also provide coverage for the period of time required to adhere to the code upgrades. Typical wording is the following:

Increased Cost of Construction
This policy also covers any increase in the Business Interruption and extra expense loss arising out of the additional time required to comply with state law or ordinance.

All business owners should call their agents to give their policies a little spring check-up on code upgrade coverage.

Based on most news reports, the oil rig had an "explosion" and a "fire" and "oil" is spewing into the sea. The Insurance Service Office (ISO) has standard forms that do not provide coverage for property damage caused by release of "pollutants" unless the discharge, dispersal, migration, release, or escape is from a "specified cause of loss."

"Oil" may fall under the definition of a "pollutant," which is generally defined as:

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

So, what are the "specified causes of loss?" "Specified Cause of Loss" is limited to the named perils of fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles; riot or civil commotion, vandalism; leakage from fire extinguishing equipment; sinkhole collapse; volcanic action; falling objects, weight of snow, ice, or sleet; and water damage.

I can imagine a number of policyholder readers exclaiming, "Eureka!! We have explosion and a fire. And, if a hurricane drives the oil into the insured property, we have a windstorm as well. The oil damage is covered!" Whether insurers will agree that an explosion released the oil and caused the damage will probably determine whether coverage payments are promptly made.

The ISO CP 00 10 form also provides coverage of $10,000 for expenses to extract "pollutants" from land or water at the insured premises, if the discharge, dispersal, seepage, migration, release or escape was caused by a "covered cause of loss." "Oil" may be a "pollutant," although it has not touched or damaged any "insured" coastal property that I am aware. Forms should be reviewed to determine if greater amounts above the automatic $10,000 were purchased by endorsement. BP should expect subrogation from insurers paying on these claims under this form. Insurers should remind their agents of this standard language and prepare for adjustment.

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

I can also imagine a number of policyholders wondering how a "property" insurance policy can exclude "land" as "covered property" since most think of "land" as the ultimate form of "property." Welcome to my world. 

Here is the relevant language that has been added to Fla. Stat. 627.706:

627.706 Sinkhole insurance; catastrophic ground cover collapse; definitions.—
 

(5) An insurer offering sinkhole coverage to policyholders before or after
the adoption of s. 30, chapter 2007-1, Laws of Florida, may nonrenew the
policies of policyholders maintaining sinkhole coverage in Pasco County or
Hernando County, at the option of the insurer, and provide an offer of
coverage to such policyholders which includes catastrophic ground cover
collapse and excludes sinkhole coverage. Insurers acting in accordance with
this subsection are subject to the following requirements:

(a) Policyholders must be notified that a nonrenewal is for purposes of
removing sinkhole coverage, and that the policyholder is still being offered
a policy that provides coverage for catastrophic ground cover collapse.
(b) Policyholders must be provided an actuarially reasonable premium
credit or discount for the removal of sinkhole coverage and provision of only
catastrophic ground cover collapse.
(c) Subject to the provisions of this subsection and the insurer’s approved
underwriting or insurability guidelines, the insurer shall provide each policyholder with the opportunity to purchase an endorsement to his or her
policy providing sinkhole coverage and may require an inspection of the
property before issuance of a sinkhole coverage endorsement.
(d) Section 624.4305 does not apply to nonrenewal notices issued pursuant
to this subsection.

Prior to this amendment, and still in counties other than Pasco and Hernando, an insurer was required to offer a renewal policy that contained sinkhole coverage, but the insured could opt-out of the coverage if he/she elected to do so. Without any action on behalf of the insured, sinkhole coverage would remain in the policy. That has now changed in Pasco and Hernando counties. For residents of those counties, I suggest you review your policy to see if sinkhole coverage has been removed. If your policy has not yet come up for renewal this year, please pay close attention to the new policy that is issued and any notices your insurer sends. This new law does give insureds in Pasco and Hernando counties the ability to purchase sinkhole coverage by way of endorsement for an added premium. If you have property in Pasco or Hernando county and you have a policy where sinkhole coverage has been removed by the insurer, you should consider paying the additional premium to have the coverage added back into the policy. Sinkhole losses are most often total losses. Without sinkhole insurance, a sinkhole can be financially devastating.

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

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

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

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

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

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

The FC&S notes that: 

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

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

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

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

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

Have a great day!!

In Recent Developments - Adams v. Tennessee Farmers Mutual Insurance Company, McWherter noted:

[L]egal title is not required in order to have an insurable interest in real property. Tennessee Farmers argued that an insured’s transfer of legal title to a family member mandated a finding that there was no insurable interest. The Court of Appeals disagreed, finding that any interest in property, even the mere right to use property, is enough for a finding that there is an insurable interest. All that is required is that the insured benefit from the property’s continued existence or suffer a loss as a result of its destruction.

The Adams Court also ruled in favor of the policyholder on the issue of the duty to inform a change in ownership:

[T]he Court of Appeals rejected the proposition that an insured has a duty to notify an insurer of a change in ownership of the insured property when the change in ownership occurs after the policy is issued. ...After surveying several jurisdictions across the country, the Court of Appeals concluded that there is no such duty, reasoning “the burden is more appropriately placed on the insurer to specify when the insured will be required to notify it of changes in circumstances after the policy is delivered.” Because the policy at issue in this case had no such provision, there was no duty to disclose the change in legal ownership subsequent to the issuance of the policy.

Business interruption insurance is intended to return to the insured's business the amount of profit (gross earnings minus normal expenses) it would have earned, had there been no interruption of the business or suspension of its operations as a result of a covered loss. Policyholders’ recovery for business interruption claims as a result of the recent volcanic eruption is unlikely because most policies require direct physical damage to the insured in order to trigger this type of coverage.

With so much lost income at stake, the coverage dispute will certainly be hard fought. As a matter of Property and Aviation Law, some state courts have found that ownership interest of a surface proprietor could extend to the airspace above the property. See, e.g., Berenson Wholesale v. Arizona Public Public Service Co., 803 P.2d 930 (Ariz. App. 1990). As noted in my previous blog,

It has been reported that volcanic ash is extremely fine and, if aspirated, it could damage airplane engines and affect the navigation gear. P&C National Underwriter reported that the last eruption from this volcano lasted more than 12 months.

It is likely that policyholder advocates will argue that the volcanic ash damaged the integrity of the property’s airspace. Of course, a reading of each policy at issue will be necessary to understand the nature of the coverages afforded for a disaster of this nature and to qualify the definitions of what constitutes “property,” “direct physical loss” and “property damage.” At this time, though, the coverage issue is far from resolved.

Depending on the specific policy language involved and the nature and circumstances of the damages, the airline industry and many insureds could find recovery for business losses caused by this massive natural disaster.

For example, with so many businesses dependent on airline services for their supply and demand operations, contingent business coverage, if applicable, could provide business interruption coverage for the suspension or delay in the chain of services or goods. There are four (4) types of dependent business ISO endorsements:

1. Contributing Premises, such as the businesses that deliver materials to the insured,
2. Recipient Premises, such as the businesses that receive the insured’s products,
3. Manufacturing Premises (businesses that make products for delivery to the insured) and
4. Leader Premises, such as businesses that bring the customers to the insured.

If coverage is found, the airline industry and other insureds could also look into extra expense coverage as an additional coverage that goes beyond the typical coverage for direct physical losses contemplated by the general insuring agreement. Extra expense coverage should allow a business to continue in the event of an emergency, by indemnifying the insured for reasonable and necessary increased costs of operations that would not normally have been incurred, but for the covered loss (i.e., employee overtime and temporary computer systems or office equipment). 

F.S. 627.706 states in part:

627.706 Sinkhole insurance; catastrophic ground cover collapse; definitions.--  

.....

(c) "Sinkhole loss" means structural damage to the building, including the foundation, caused by sinkhole activity. Contents coverage shall apply only if there is structural damage to the building caused by sinkhole activity.  

The meaning of the word "structural" was recently brought before Judge Barton in Hillsborough County and he ruled against the insurance company, holding that "structural" damage means damage to the "structure," which includes purely cosmetic damages. See Judge Barton’s order below:

While this is not an appellate decision, it is persuasive authority and insurance companies who take this position should be challenged every time.
 

In Secured Realty Inv. Fund v. Highlands Ins. Co., 678 So. 2d 852, 854 (Fla. Dist. Ct. App. 3d Dist. 1996), the Court set forth the basic differences:

"A loss payable clause is one method by which a lienholder or mortgagee protects its property interest. Generally, two types of loss payable clauses exist and are often referred to as (1) an open loss payable clause, and (2) a union, standard or New York clause."...An "open loss payable clause simply states that 'loss, if any, is payable to B. as his interest shall appear', or uses other equivalent words, merely identifying the person who may collect the proceeds."...A union, standard, or New York clause, on the other hand, provides, in addition to the above quoted provision, language to the effect that "the owner/mortgagor's acts or neglect will not invalidate the insurance provided that if the owner/mortgagor fails to pay premiums due, the lienholder/mortgagee shall on demand pay the premiums."...(Citations omitted)

While a "simple" loss payee may bring an action under the policy, a loss payee under such an "open" loss payable clause has rights to collect only if the named insured as described in Demay v. Dependable Ins. Co., 638 So. 2d 96, 97 (Fla. Dist. Ct. App. 2d Dist. 1994):

The loss payee clause under the policy at issue is commonly referred to as the "ordinary," "open-mortgage clause" or "simple" loss payable clause...such a clause without language to the effect that the interest of the lienholder shall not be invalidated by any act or neglect of the mortgagor, does not create a contract between the insurer and the loss payee and does not give the loss payee any rights greater than those to which the insured is entitled. ...Thus, the DeMays are subject to any defenses Dependable might assert against Finch. Although the DeMays are subject to those defenses, such a loss payee clause has been construed to confer upon the loss payee third-party beneficiary standing to bring an action against the insurer...The trial court, therefore, erred in dismissing the DeMays' complaint with prejudice on that ground. (citations omitted)

On the other hand, Independent Fire Ins. Co. v. NCNB Nat'l Bank, 517 So. 2d 59 (Fla. Dist. Ct. App. 1st Dist. 1987) discusses how a "standard" clause provides much greater rights:

[F]ire insurance policies usually contain either of two distinct types of mortgage clauses. An "open" mortgage clause states only that any loss is payable to the named mortgagee as his interest shall appear and subjects the mortgagee to any defenses the insurance company may have against the owner or mortgagor of the property based on the latter's neglect or default. A "standard union" (also known as a "New York") mortgage clause contains similar provisions, but characteristically provides, in addition, that the mortgagee's coverage will not be invalidated by a foreclosure, a change in ownership, a more hazardous use of the property, or a loss caused by the neglect of the owner, provided that the mortgagee pays any premium demanded should the owner fail to do so...A standard union mortgage clause has been held to create a separate agreement between the insurance company and the mortgagee in which policy provisions of the insurance contract not in conflict with the mortgage clause become part of this separate contract. (citations omitted)

I view the standard mortgagee clause as making a mortgagee a "super insured." For example, the insured can burn the structure and the mortgagee will still collect. On the other hand, a lienholder with a "simple" loss payable clause better hope that fire was caused by something or somebody other than the named insured because that lienholder is collecting only if the insured can collect.

If the policy is silent as to whether the policyholder is entitled to reimbursement for these expenses, many courts have found that they are. In City of Laguna Beach v. Mead Reinsurance Corp., 226 Cal.App. 3d 822 (Cal.App. 4 Dist. 1990), for instance, the Court focused on the fact that the insured’s duty to mitigate the damages is intended for the benefit of the insurer by lessening the amount that must be paid under the policy. The Court held that since the temporary repairs were intended to benefit the insurer, the policyholder was entitled to reimbursement.

In McNeilab, Inc. v. North River Ins. Co., 645 F. Supp. 525 (D. N.J. 1986), a New Jersey court came to a similar conclusion. The McNeilab Court found that where an insured took steps to minimize damages which had already occurred, the insurer must reimburse the policyholder for the reasonable expenses incurred.

Also, for mitigation expenses to be reimbursed, the loss being mitigated usually must be covered under the policy. See Swire Pacific Holdings, Inc. v. Zurich Ins. Co., 139 F.Supp. 2d 1374 (S.D. Fla. 2001). Likewise, in Witcher Const. Co. v. Saint Paul Fire and Marine Ins. Co., 550 N.W.2d 1 ( Minn. Ct. App. 1996), the Court held that the policyholder’s obligation to prevent or mitigate harm does not arise until insured subject matter is threatened by covered loss, but if the prevented loss falls within an exclusion, the insured has no right to indemnity for its efforts.

Therefore, if the loss is determined not to be covered by the policy, the insurer may not have an obligation to reimburse the policyholder for expenses associated with temporary repairs. This, however, should not deter anyone from taking all reasonable steps to prevent further harm. Many times, there is coverage for things which at first glance may seem to be excluded by the policy. With the exclusions, exceptions to exclusions, and the like, insurance policies are a maze of coverages, and many require a professional to interpret. Even if you think a loss may not be covered, it is important to take the steps reasonably necessary to prevent any further damage so as not to provide the insurer with a possible basis for denying a claim that turns out to be covered.

Significant is the reasoning provided by United Property & Casualty for removal of appraisal:

The Appraisal clause is being eliminated. We are taking this action because the current appraisal language, as it exists, does not give insurers recourse to meaningful judicial review. Furthermore, the basis of awards under Appraisal is outside the scrutiny of both policyholders and insurers.

Eliminating the appraisal clause will mean that our policy contracts will follow Mediation, which is the Florida Legislature’s preferred method of dispute resolution.

Interestingly, the Courts have approved appraisal as a means to keep the matter away from litigation. United Property seems to want a mechanism to get disputes into litigation.

I am not certain that mediation is preferred by the legislature. The legislature has enacted laws that demand that insurers fully investigate a loss and promptly pay claims for the full amount.

Certainly, if the insurers can get unwary policyholders into mediation without professional representation and threaten the potential of a lawsuit without the possibility of appraisal, insurers will gain "leverage" in the negotiation of a dispute because delay works to an insurer's advantage. This is not what Florida legislators, except those politicians in the pockets of the insurers, want for Floridians.

Still, the trend is clear---appraisal is becoming less of an option. Many insurers are not happy with the results of appraisal and think our judicial system provides a better forum to fairly resolve disputes.

The usual coverage question in this type of situation is whether the insurance carrier satisfies its replacement cost obligation by replacing the one tile, or does it have an obligation to replace the entire floor to achieve uniformity. “Matching” coverage disputes are highly contentious and controversial. Most insurance carriers will likely insist that they do not have an obligation to replace the undamaged property in a partial loss or that replacement can be achieved by harvesting a tile from an inconspicuous location at the property. However, policyholders are promised “new for old” benefits when they purchase the pricier replacement cost provision and most would shudder at the thought having to look at their patchy homes or businesses if the replacement is not uniform in appearance or quality.

The bottom line is that “patchy” properties lose value. Most replacement cost provisions should provide for full replacement of the undamaged property in those cases considering the valuation impact of a partial repair.

Luckily in Florida, the Legislature addressed this concern.

§ 626.9744. Claim settlement practices relating to property insurance

Unless otherwise provided by the policy, when a homeowner's insurance policy provides for the adjustment and settlement of first-party losses based on repair or replacement cost, the following requirements apply:

(1) When a loss requires repair or replacement of an item or part, any physical damage incurred in making such repair or replacement which is covered and not otherwise excluded by the policy shall be included in the loss to the extent of any applicable limits. The insured may not be required to pay for betterment required by ordinance or code except for the applicable deductible, unless specifically excluded or limited by the policy.

(2) When a loss requires replacement of items and the replaced items do not match in quality, color, or size, the insurer shall make reasonable repairs or replacement of items in adjoining areas. In determining the extent of the repairs or replacement of items in adjoining areas, the insurer may consider the cost of repairing or replacing the undamaged portions of the property, the degree of uniformity that can be achieved without such cost, the remaining useful life of the undamaged portion, and other relevant factors.

(3) This section shall not be construed to make the insurer a warrantor of the repairs made pursuant to this section.

(4) Nothing in this section shall be construed to authorize or preclude enforcement of policy provisions relating to settlement disputes.

For Florida policyholders, if the policy calls for replacement cost and the loss occurred after October 1, 2005, it is important to know that Florida Statute § 627.7011 prevents an insurer from attempting to depreciate the undamaged portion of the structure that needs to be replaced due to matching:

(3) In the event of a loss for which a dwelling or personal property is insured on the basis of replacement costs, the insurer shall pay the replacement cost without reservation or holdback of any depreciation in value, whether or not the insured replaces or repairs the dwelling or property.

According to the above, there is no reason why a policyholder should accept less than full replacement of his tile floor and not be afraid of moving appliances or furniture around their homes to avoid showing a harvested or patchy tile repair. According to the clear language of the law, there is also no reason why an insurance carrier should depreciate the value of the undamaged portion when considering the cost of repair or replacement. 

Not all properties are alike. Buildings may have unique or obsolete construction materials and there may be large difference between replacement cost and market value at the time of a loss. Since generally, replacement cost coverage will be triggered after repairs or replacements have commenced, this scenario would put the policyholder at a financial disadvantage since the cost to replace damaged property with functionally equivalent property is more than its actual cash value and less than its replacement value. It should thus be considered “good business practice” for an agent to evaluate the uniqueness and value of the insured property before binding replacement coverage as the best valuation alternative.

Functional Replacement Coverage (FRC) is used when a functionally equivalent building can replace the original at a lower cost than would be required by an identical replacement. Functional replacement cost valuation provides a lower valuation than replacement cost, resulting in a reduction of the amount of insurance coverage required and thus lower premiums.

FCR coverage may be more favorable for certain items than actual cash value. Most FCR loss settlement provisions provide that losses will be settled following one of these two methods: replacement with a less costly, but functionally equivalent building; or, in the case of a partial loss, restoration of the damaged portion in the same architectural style, but with less costly material (ie replacing a mahogany banister with a pine banister).

The FC&S Bulletin explains the functional cost endorsement as follows:

“Functional Replacement Cost Loss Settlement (Forms HO 00 02,
HO 00 03, and HO 00 05 only)
HO 05 30 10 00

This endorsement may be used when broader coverages are desired than those provided by the HO 00 08, but the insured or insurer does not wish to insure to full replacement cost. This might be the case with an older, ornate home that incorporates stone-, wood-, or plasterwork not readily available.

Replacement cost may so far outstrip market value that to insure based on replacement would do a disservice to the insured, since it is unlikely that the home could be replaced exactly as it stands. Therefore, use of this endorsement provides the insured with the broad range of coverages available in the ISO program, yet allows a more realistic amount of insurance to be selected.

The coverage A limit of liability is chosen based on "functional replacement cost," that is, the amount it would cost to repair or replace using materials that are functionally equivalent to obsolete, antique, or custom methods and materials. For example, plaster walls would be replaced with dry wall, pocket doors with plain doors. The loss settlement provisions substitute "functional replacement cost" anywhere "full replacement cost" appears.

Modified functional replacement cost loss settlement endorsement, HO 05 31, is virtually identical except that if the necessary amount actually spent to repair or replace is less than the actual cash value of the part of the damaged building then the loss is settled on an actual cash value basis.”

A recent opinion on functional replacement coverage was also published in FC&S Bulletin that should help a better understanding this valuation method and its practical usefulness.

Functional Building Evaluation Endorsement as Applied to Partial Loss

December 10, 2009

We have written an old church on a standard ISO form with a Functional Building Evaluation endorsement, CP 04 38 10 00. The building value is a fraction of what it would cost to be replaced but the limit is sufficient to put up a building of the same square footage that would be functional.
The insured suffered a partial wind damage loss. We adjusted the loss based on replacement cost less depreciation and offered that amount. The insured's agent is demanding that the partial loss be paid without the depreciation, at full replacement cost. Can you please advise if we are entitled to depreciate the loss because it is the smaller amount to settle the claim?

Connecticut Subscriber

It is our opinion that you are not entitled to depreciate the loss. The CP 04 38 states that the insured will receive the cost to repair or replace the damaged portion of the building with less costly material, if available, in the architectural style that existed before the loss or damage occurred. This is not the same thing as receiving a depreciated amount, but is less than the full replacement cost because less costly materials are used.

1. Read the Policy.

The insurance policy is a contract between the carrier and the insured, and claim is governed by that contract. You must read every single word of the contract to know exactly what is in there. Is it an all-risk policy or named-perils policy? Is any part of the claim excluded or limited and, if so, is there an exception to the exclusion? Does the insured have to submit a proof of loss within sixty days of the loss or is it by request? Is the language of pertinent provisions clear or ambiguous? In a recent Georgia case where a frozen pipe burst and flooded a building, I discovered that the standard vacancy provision which excluded the claim was a little garbled. Whoever typed up the policy had inadvertently transposed a few words, changing the meaning of the provision entirely. Because the provision was rendered ambiguous, it was interpreted to provide coverage for the otherwise-excluded claim. It is important to read each provision carefully, keeping in mind the specific facts of your case.

2. Know the Law in Your Jurisdiction.

Even basic principles can vary from state to state. For example, a policyholder making a claim under an all-risk policy in some states only has to show that he has incurred a loss. The burden then shifts to the carrier to show that the claim is not covered or excluded. However in some states, the burden of proving the claim is always on the insured. Know the law in your state and, if you have a multi-jurisdictional practice, take the time to learn the law of states where you practice. Don’t assume the law is the same everywhere.

It is also important to thoroughly research the law regarding the particular provisions that apply to your case. For example, in one of my Texas cases, the claim was clearly excluded by a provision that related to the cause of the loss. However, the exclusion contained the phrase, “An ensuing loss will be covered.” After researching the definition of “ensuing loss”, I found that, although the phrase has not been legally defined in many states, Texas case law had given that term a specific meaning which excepted my client’s claim from the exclusion. It pays to research the issues in your case.

3. Get and Put Everything in Writing.

Every event in the case should be documented in writing. For example, although most policies require notice of the claim to be in writing, most policyholders give the carrier notice of the claim simply by telephoning their insurance agent. That may or may not constitute proper notice under the laws of your state. (See Basic Rule No. 2). Unless proper written notice has been given, follow up with a written notice of the claim.

All oral discussions, offers, demands, and agreements should be confirmed in writing. For instance, you may write: “This confirms that you will inspect the loss at 2 p.m. on Friday the 19th”, or “This confirms our conversation where you told me that you will provide your estimate to me within two weeks.” Every conversation should be documented. The insurance company is documenting every event in the claim --- the adjuster makes an entry in a computerized log describing every conversation and event in the claim, in a way that ultimately looks favorable to the carrier. Contemporaneous logs or diaries are powerful evidence in court. Your documentation may be used later to counter the insurance company’s version of the events. The insured should have his/her own documentation showing that, for example, the adjuster didn’t show up at the agreed time or failed to provide the estimate as promised. Such documentation serves to refresh the memory of those who later disagree as to what was promised or done.

4. Cooperate with the Insurance Company.

The insurance policy places certain duties on the insured when there is a loss. If the insurance company requests it, the insured must provide documentation, submit a proof of loss, and submit to an examination under oath. In most states, cooperation is a condition precedent to recovery on the claim. The insured should comply with all reasonable requests promptly. If the insured fails to fully cooperate, it can seriously impact his recovery on the insurance claim.

The scope of the insured’s duties can be determined by reading the policy (Basic Rule No. 1) and knowing the law (Basic Rule No. 2). For example, the policy may state that the insurance company can examine only the insured, or it can also state the insurance company can examine the insured as well as all of its employees. The policy will specifically spell out the policyholder’s duties when there is a claim. (See Basic Rule No. 1). You should research the law in your jurisdiction to determine the full extent of the insured’s obligation regarding documentation, examinations under oath, and the proof of loss. (Basic Rule No. 2).

5. Be Proactive.

The insured, and/or her representatives, should act affirmatively to push the claim forward. It is not enough to simply wait for the insurance company to finish its investigation. One of the most important steps is to document the claim thoroughly. If, for instance, the damaged property is being repaired, it should be extensively photographed before, during and after repairs. The insured should prepare an estimate of the damages independently of the insurance company’s estimate. All documentation regarding the claim --- like financial statements for a lost profits claim --- should be gathered and assembled before the insurance company requests them.

The insured should send a pre-suit notice letter if such is required in the jurisdiction (See Basic Rule No. 2). The insured should set time frames and deadlines for the insurance company to follow. For instance, it is fair to demand (in writing --- Basic Rule No. 3) that the insurance company keep the insured updated on the investigation. For example, if the insurance company had an engineer inspect the property, why doesn’t the insured have a copy of the report six weeks later? Be persistent in following up with the adjuster --- the squeaky wheel gets the grease. This will ensure that the claim moves along without delay.

First, I am merely paraphrasing the lecture. Order the video from NAPIA to fully appreciate the concepts.

Second, I will be discussing some case law regarding these issues over the next several weeks. Judges, not lecturers, decide what is and is not covered. Real life results and case examples are important.

Still, Eshoo made the following notation in his lecture regarding how the all risk policies work when faced with structural losses allegedly caused by a defective product, such as Chinese drywall:

A resulting loss is covered even if a defective product is a "but for" cause of the loss. The intent of the exclusion and exception is to exclude only that portion of the loss attributable to the defective product. In other words, losses that are defective products are not covered, while those losses that result from the defective product are covered.

The exclusion and exception, read together, operate to eliminate the conduct or defect from consideration in analyzing the cause of resulting damage; only the actual risk causing the resulting physical damage is subject to the coverage analysis.

To the extent that cause is neither excluded nor excepted in the applicable policy, coverage exists for the damage which resulted from the defective product.

This is an excellent phrasing of how the "ensuing loss" provision works. I suggest that others seeking coverage adopt it rather than some of the convoluted discussions by courts.

The factual and legal burden of proof to demonstrate that a loss occurs within the language of an all risk policy was properly described as follows:

An insured seeking to recover under an "all risks" insurance policy merely has the burden of proving only that direct physical loss or damage occurred to covered property while the policy was in force.

Once the insured establishes a loss apparently within the terms of an "all risks" policy, the burden shifts to the insurer to prove that the loss arose from a cause which is excluded.

The insured is not required to disprove any excluded cause of loss.

...

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

I will analyze these principals in greater detail later as they relate to Chinese drywall and how other defective building materials contribute to losses covered under all risk policies. But, the phraseology of the concepts is excellent and should be adopted by all consumer advocates.

Most policies exclude coverage for the costs of complying with building laws. Typical exclusion language reads as follows:

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:

a. Ordinance or Law, meaning enforcement of any ordinance or law regulating the construction, repair or demolition of a building or other structure, unless specifically provided under this policy.

This type of exclusionary provision can be devastating. In State Farm Fire and Cas. Co. v. Metropolitan Dade County, 639 So.2d 63 (Fla. 3rd DCA 1994), the local government required homeowners to bring their properties into full compliance with the South Florida Building Code after Hurricane Andrew. Dade County sued State Farm for a declaration that such upgrades were covered losses.

State Farm argued that it was only liable for hurricane damage, and not the "increased costs" from the enforcement of local codes. The lower court found the exclusionary language ambiguous, and found coverage for the homeowners. The appellate court reversed, upholding that ordinance and law exclusion specifically stated that the losses occurred only because of the enforcement of the code - the "ordinance and law" - and that the exclusion clearly and unambiguously prohibited payment under those circumstances.

Today, insurers are forced to offer law and ordinance coverage by law. If the insured does not obtain a policyholder’s written refusal of law and ordinance coverage, any policy covering the dwelling is deemed to include the law and ordinance coverage--limited to 25% of the dwelling limit. See, Fla. Stat.§627.7011

Please note that despite the language in Florida Statute §627.7011, an insured is also permitted to reject any such coverage, and instead receive compensation based on the value of the repairs (ie. replacement cost coverage), without the need for additional code upgrade compliance.

In any given case, however, code upgrade coverage will greatly depend on the language of the policy in question and the type of coverage that the policyholder has elected to purchase. As with any other insurance provision, any ambiguity should be resolved in favor of the insured.

Many courts have interpreted the often contradicting code upgrade exclusions. While the case law is certainly conflicting on this issue, many courts have ruled that code upgrade losses are covered, despite the exclusionary language, if they are an efficient proximate cause of a covered peril, but not on their own. Garnett v. Transamerica Insurance Services, 800 P.2d 656 (Idaho, 1990) is illustrative of these cases. There, a fire damaged a commercial building owned by the Garnetts and insured by Transamerica. Local building codes required various upgrades to the building, and Transamerica denied coverage for those costs based on the policy's code upgrade exclusion. The court narrowly read the exclusion, which was preceded by anti-concurrent language [loss occasioned directly or indirectly] to apply only where the loss itself is caused by a law or ordinance, not where a law or ordinance required upgrades after a loss:

As we read this provision, it does not limit Transamerica's obligation for the cost of repair or replacement of the building when a loss has occurred that is covered by the policy, but merely states that if the loss itself is caused by an ordinance or law, there is no coverage. For instance, if some safety improvement of a building to which no other loss had occurred were required by an ordinance or law, Transamerica would not be liable. However, when the cost of repairing or replacing a building that had been damaged by fire is increased by the requirements of an ordinance or law, Transamerica is not relieved of that cost.

If specifically purchased, code upgrade coverage will generally provide coverage for the increased cost of complying with building codes governing the repair, reconstruction, or demolition of the damaged property. Some of the most contested issues in code upgrade coverage cases is whether there is coverage for the costs of complying with preexisting code violations and whether the insurance company is liable to pay for the cost incurred as a result of a law or ordinance that took effect after the date of loss. Of course, the answer to these questions will greatly depend on the language of the policy and the jurisdiction where the coverage dispute arises.

For an insightful discussion of how code upgrade coverage can also provide coverage for the cost required to correct pre-existing code violations and grandfathered-in code provisions, please refer to Chip’s blog entry, Increased Cost of Compliance to Code and Ordinance of Law Coverage for a Typical Loss Situation.

On the other hand, the insurer’s liability for post-loss enacted codes likely will turn on the policy’s language. If the policy specifically limits the insurer's liability to those increased costs necessitated by laws and ordinances “in force at the time of loss,” that limitation should be upheld because courts will enforce policy language that is plain and unambiguous as written. A more difficult question arises in cases where the in force type of language is not present. However, insurers could reasonably argue that there is no coverage under the endorsement for the increased cost of construction due to building laws and ordinances that took effect after the date of loss. Then, a policyholder may argue that there is coverage for the costs of complying with post-loss enacted laws and ordinances in the absence of any explicit language limiting the coverage. He may also argue that it is reasonable to expect such coverage under the replacement cost provision, absent any language to the contrary.

At least one federal district court has rejected similar policyholder arguments and held that an insurer was not liable for the cost of complying with post-loss enacted building codes. See B A Properties, Inc. v. Aetna Casualty & Surety Co., 273 F.Supp. 2d 673 (D.V.I. 2003). In BA Properties, the policy did not include any “in force at the time of the loss” language. However, the court rejected the insured’s argument because the replacement cost provision determined the value at the time of the loss and interpreting the law and ordinance provision otherwise would alter its interpretation of the clear and unambiguous replacement cost provision.

In my opinion, B.A. Properties is a well reasoned decision and other courts will likely follow it, despite a policy’s silence with respect to post-loss code enactment.

Under most policies, an insurance company’s obligation to pay replacement cost value (RCV) does not arise until the repair or replacement has been completed, and the insurance company will never be responsible for any amount in excess of what it actually costs to repair or replace. However, if an insurance company denies a claim and fails to pay any benefits under the policy, it could be argued that an insurer cannot require compliance with the replacement cost provision or any other condition precedent, as a matter of contract law.

In Florida, it is well-established that a party who prevents or renders impossible the performance or occurrence of a condition precedent, upon which his liability is contingent, cannot avail himself of his own wrong, and be relieved of his responsibility to perform under the contract. See, North American Van Lines v. Collyer, 616 So.2d 177 (Fla. 5th DCA 1993). By the same token, it can be argued that by denying liability and refusing payment under a policy, an insurer prevents the insured from complying with the policy’s replacement cost provision and cannot require specific performance after the claim denial.

In Bailey v. Farmer’s Union Cooperative Ins. Co. of Nebraska, 498 N.W.2d 591 (Neb. Ct. App. 1992), the insured’s home collapsed during an excavation to perform renovations—which was a covered peril under the policy. The policy provided coverage for the least expensive of the three, 1) policy limits, 2) RCV of the home for like construction and use on the same premises, or 3) the necessary amount actually spent to repair or replace the home. As in most policies, Bailey’s replacement cost provision obligated the insured to pay no more than the actual cash value (ACV) until the actual repair or replacement was complete. Without extending coverage for the loss, Bailey’s insurer tendered a settlement offer of $11,900 as ACV to bring the “doubtful and disputed claim to a close” Bailey rejected the offer and demanded her ACV option with an opportunity to claim RCV after incurring in the expenses. Still refusing to extend coverage, Bailey’s insurer rejected her demand and offered to buy her a dwelling of like kind and quality in the same neighborhood, but Bailey insisted on rebuilding on the same site and a lawsuit ensued. The Bailey court held that:

Bailey was prevented from satisfying the condition of rebuilding […] by Farmers Union's refusal to assure Bailey that, in addition to the actual cash value figure, the cost of rebuilding her home would be covered up to the policy limit. A condition is excused if the occurrence of the condition is prevented by the party whose performance is dependent upon the condition. Chadd v. Midwest Franchise Corp., 226 Neb. 502, 412 N.W.2d 453 (1987). Though in Nebraska this general principle of contract law has not yet been applied specifically to a set of facts analogous to those of the case at bar, we are persuaded by the reasoning of the Michigan Court of Appeals in Pollock v. Fire Ins. Exchange, 167 Mich.App. 415, 423 N.W.2d 234 (1988), that an insured should not be barred from recovery for failure to rebuild within the time constraints of the policy when the conduct of the insurer prevented the insured from rebuilding.

Likewise, in Vantage View v. QBE Ins. Corp., 2009 WL 536546 (S.D. Fla. March 3, 2009), the insurer denied the claim. The court, relying on Bailey, held that it is not “reasonably possible” for the insured to make repairs without receipt of the funds from the insurer and that the insured was therefore relieved from its obligation of repairing or replacing the damaged property before demanding replacement cost value.

It is important to note that both Bailey and Vantage View are cases where the insureds were denied any benefits prior to filing suit and the insureds were unable to repair or replace the damaged property out of their own pocket. It therefore follows that, if there are no other provisions or exclusions that prevent coverage, an insured may be entitled to receive RCV benefits without having first repaired or replaced the damaged property, as required under a particular policy.

The portion of the statute upon which State Farm relied stated:

The insurer may limit its payment to the actual cash value of the sinkhole loss, not including underpinning or grouting or any other repair technique performed below the existing foundation of the building, until the policyholder enters into a contract for the performance of building stabilization or foundation repairs. After the policyholder enters into the contract, the insurer shall pay the amounts necessary to begin and perform such repairs as the work is performed and the expenses are incurred. The insurer may not require the policyholder to advance payment for such repairs.

The insureds argued that that the language in their homeowners’ policies, which required payment within sixty days after the amount of the loss is settled by appraisal, controlled.

Finding that the language of Florida Statute 627.707(5)(b) was permissive and not mandatory, Florida’s Fifth District Court of Appeal agreed with the insureds and held State Farm to the terms of the policy it wrote.

We construe this language as permissive, not mandatory. Because it is permissive, the policy language that requires payment of subsurface repairs within sixty days after the appraisal award is not in conflict with the statute and is binding on the parties to the insurance contract.

You can read the slip opinion here.

As I’m sure you are aware (After all I do say it every week!), each situation and every jurisdiction and policy are different. In some circumstances a policy may specifically state which agents of the insurer have the ability to waive the Proof requirement. With the National Flood Insurance Program, for instance, neither the “Write Your Own” carrier nor the adjuster has the authority to waive post loss obligations. As the policy states, only FEMA may waive the requirement that an insured submit a Proof of Loss. When a policy is this explicit, relying on a verbal or written waiver by someone other than the individuals listed in the policy may provide the insurer with a reason to deny the claim entirely. In the case of the National Flood Insurance Policies, you can almost be guaranteed of it. See Sanz v. United States Security Insurance Co., 328 F.3d 1314 (11th Cir.2003)(holding the Proof of Loss requirements may be waived, but to be effective the waiver must be made by the Federal Insurance Administrator and must be in writing).

In many instances, however, things are not so clear cut. The policy may be silent as to which individuals may waive post loss obligations, at which time it is important to analyze the actual and apparent authority of the insurer’s agent. Actual authority is fairly straight forward. If the individual has had the authority to waive post loss obligations conferred upon him/her by an agreement with the insurer then they obviously have the authority to bind the insurer by their actions. For instance, an individual has been entrusted to conduct all of the business of an insurer in a particular area likely has actual authority to waive a Proof of Loss requirement.

Where the situation gets more complicated, however, is when the individual does not indeed have authority to waive a post loss requirement. Arguing that an individual has apparent authority is extremely fact intensive and must be analyzed very carefully. Most importantly, the insured must reasonably believe that the individual has the authority to bind the insurer and thus waive the Proof of Loss requirement. This involves looking at the interplay between the insured, insurer, and the insurer’s individual agent.

If the individual purporting to have the authority to waive the Proof of Loss requirement specifically tells the insured that he/she has the ability to do so, it is more likely that a court would find that it was reasonable for the insured to rely upon this assertion. Similarly, if the insurer knows that its agent is claiming to have the authority to waive post loss obligations or has incorrectly done so, the insurer’s failure to act to correct the mistake may also be enough for a court to find that the individual has apparent authority and the waiver is effective.

Also, an individual’s position with the insurer may play a role in whether or not there is apparent authority. For instance, a court may find that an adjuster or executive of the insurer had apparent authority to waive the Proof of Loss requirement and that the insured was reasonable in relying on this authority. A court is not likely, however, to buy an argument that the night watchman at the insurer’s offices had such authority or that the policyholder was reasonable in relying on his waiving the policy provisions

There are numerous circumstances which may play a role in whether an individual has apparent authority to waive a Proof of Loss requirement, however the important thing is that the insured actually believes that the authority is legitimate. An insured has no duty to investigate to determine whether or not the person claiming to waive a post loss obligation indeed has authority to do so. As the court said, “[t]he public has a right to rely upon an agent's apparent authority and are not required to inquire as to his special powers unless the circumstances are such as to put them on inquiry”. Guarantee Mutual Fire Ins. Co. v. Jacobson, 57 so.2d 845, 848 (Fla. 1952). If the insured however has knowledge that the individual purporting to waive the Proof of Loss requirement does not have the authority to do so on behalf of the insurer, or such a belief is not reasonable, the court may find that no apparent authority exists and the claim may be denied if a Proof of Loss is not timely submitted.

Proving waiver of the Proof of Loss requirement and other post loss obligations is possible, but it can be very contentious and difficult. This can be avoided in many situations, however, by simply filing the Proof when possible. If it is not possible or not filed, just be aware that there may be an argument for waiver.

The Moultons owned several properties that were damaged when Hurricane Ivan struck the Pensacola area in September 2004. In March of 2005, while that claim process was still underway, the Moultons’ insurance carrier dropped them, and the Moultons asked their insurance agent, Fisher-Brown, to find new coverage. Fisher-Brown enlisted the help of Peachtree Special Risk Brokers, LLC (Peachtree), an independent insurance broker, to help in procuring coverage from surplus lines carriers. There was an email discussion between Fisher-Brown and Peachtree about the damage caused by Ivan and the extent of the repairs made. Fisher-Brown volunteered information that all of the Moultons’ property had been repaired, except for cosmetic damage, and that the claims process was still underway but the carrier set up a reserve of 2.2 million. Peachtree related to Landmark and Arch that all Ivan losses had been repaired at a cost of 2.2 million.

On June 14, 2005, Landmark submitted a written quote to Peachtree for the Moulton properties which stated, “our quote is subject to all damage from Ivan being completed and subject to no damage from Arlene,” [emphasis added] and Arch sent Fisher-Brown a quote for its surplus lines policy, adopting the limiting language used by Landmark. The Moultons purchased the primary policy offered by Landmark and the excess policy offered by Arch. Landmark's binder for coverage reiterated “our quote is subject to all damage from Ivan being completed and subject to no damage from Arlene.” The policy issued by Landmark included “Endorsement No. 1” which stated: “In consideration of the premium charged, it is hereby agreed coverage from this policy is subject to all damage from Hurricane Ivan being completed prior to inception of policy. It is further agreed that coverage from this policy is subject to no damage from the Named Storm Arlene.” Arch adopted the endorsement.

Ten days after the policies took effect, Hurricane Dennis struck the Pensacola area, and the Moultons reported damage from Hurricane Dennis at some of the properties covered by the Landmark and Arch policies. The insurance companies’ adjuster inspected the damaged property and reported that he observed unrepaired damages from Hurricane Ivan. After further investigation, Landmark and Arch determined that the properties were either temporarily repaired or not completely repaired from Hurricane Ivan, and that the losses from Ivan far exceeded 2.2 million. Landmark and Arch believed this was a breach of the insurance policy and a misrepresentation or concealment of material facts during the underwriting process. The Moultons denied Landmark's contentions regarding the Ivan repairs.

Landmark and Arch decided to rescind the insurance policies based upon their determination that the property repairs were not completed prior to the effective date of the policies and that the Moultons had misrepresented that all damages from Hurricane Ivan had been fully repaired and the total amount of loss to the properties from Ivan. Landmark then filed suit, seeking a declaratory judgment as to its right to rescind the insurance policy, and Arch intervened, seeking similar declaratory relief. The Moultons filed a counterclaim for breach of contract, based on Landmark’s and Arch's failures to provide coverage under the policy.

Relying on the endorsement which stated: “In consideration of the premium charged, it is hereby agreed coverage from this policy is subject to all damage from Hurricane Ivan being completed prior to inception of policy,” Landmark and Arch argued the Moultons failed to meet a condition precedent of the insurance contract by failing to fully repair the damage to their properties from Hurricane Ivan prior to the inception of the Landmark and Arch policies. The Moultons disagreed, as the endorsement did not mention repairs. Both parties’ arguments centered on the word “damage.” Landmark and Arch argued the word actually meant that “repairs” needed to be completed. The Moultons argued “damage” and “repairs” have different and distinct meanings. In response, Landmark and Arch argued the idea of requiring damages to be completed was absurd or nonsensical because damages caused by a storm are completed once the storm has passed through, and the endorsement should be interpreted to avoid this absurd result.

Applying Florida’s standard rule of contract interpretation that policies are interpreted according to the plain meaning of the words, the Court ruled in favor of the Moultons. The Court noted that interpretation according to the plain meaning would not lead to an absurd result because, “there are types of damage that may accrue after a storm passes. For example, molds may later grow in areas that have been dampened by the storm, or structures may get weakened in a manner that may not even be detected but nevertheless accelerate the deterioration of the integrity of the structure.” Moulton, 2009 WL 3087266 at *5. The Court rejected Landmark’s and Arch’s argument in whole, noting “In essence, they ask to be rewarded with a construction of the provision most meaningful to them simply because they drafted what they now conclude to be a facially absurd provision.” Id. at *6.

The Court also declined to rule in favor of Landmark and Arch in their claims that the Moultons committed misrepresentation and fraud when obtaining the policies. Regarding the repairs, the Court concluded that because Fisher-Brown’s voluntary statements to Peachtree were not made in response to specific questions, Florida Statutes, Section 627.409, which governs rescission of an insurance policy based on the insured's misstatement or omission during the procurement process, did not apply. Likewise, regarding the damage, the Court concluded that although the ultimate amount of the settlement was significantly higher than the 2.2 million dollar figure Fisher-Brown conveyed, that statement could not be deemed a misrepresentation because Fisher-Brown also stated they did not have “any specific figures,” that the parties were still “working it out,” and that St. Paul had a “reserve set up of 2.2 million” dollars. Thus, Fisher-Brown’s statement clearly indicated that the claims had not been resolved. “Amidst this uncertainty, it cannot be said that Smith was misrepresenting the damage situation at the time, much less intentionally so.” In both cases, the Court noted the messages Peachtree conveyed to Landmark and Arch were different from the messages sent from Fisher-Brown to Peachtree. Peachtree’s statements did not accurately relate the information provided by Fisher-Brown, and the insurers may have changed the policies offered, had they received accurate information.

In sum, the Court ruled for the Moultons in that it held Landmark and Arch responsible for insurance contract as they drafted it, even though it did not reflect their intent in entering into the contract. The Court also refused to hold the Moultons responsible for statements made by Peachtree-an independent insurance agent, and refused to hold the Moultons responsible for inaccurate and incomplete statements from their agent when not made in response to specific inquiries. However, the Court essentially denied the Moultons’ counterclaims, finding that the issues of breach of contract, the amount of damage, and the insurers’ responsibility to pay were issues for trial.

Read the Court Slip Opinion here.

It is not surprising that in the aftermath of the 2004-2005 hurricane seasons, Florida’s VPL became the subject of heated litigation, academic discussions and legislative debate. The application of Florida’s VPL in cases where the total loss is caused by a covered peril(s) is fairly simple. The plot thickens in multiple causation losses and a solid understanding of the current applicability of Florida’s VPL is an essential requirement for insurance claim professionals.

Florida’s Valued Policy Law is codified under §627.702 of the Florida Statutes. The statute was significantly amended after the controversial decision in Mierzwa v. Florida Windstorm Underwriting Ass’n, 877 So.2d 774 (Fla. 4th DCA 2004). In Mierzwa, the insured’s home was damaged in part by hurricane winds, a covered peril under the policy, and partly by flood waters, an excluded peril. The Court held that pursuant to Florida’s VPL, an insurer was required to pay policy limits even if the total loss was caused in part by an excluded peril. The decision was based on a reading of the Florida’s 2004 VPL. If anyone had a problem with the ruling, they were to take it up with their favorite legislator in Tallahassee, and they did. A litigation frenzy ensued. Eventually, Mierzwa was disapproved by the Florida Supreme Court.

In Florida Farm Bureau Casualty Ins. Co. v. Cox, 967 So.2d 815 (Fla. 2007), the Supreme Court held that pursuant to Florida’s VPL, if a covered peril did not cause a total loss or a constructive total loss, an insurer will only be responsible for the percentage attributable to the covered peril.

In essence, today’s VPL, as amended, requires a causation analysis. Percentages will be allocated among perils, and the policy will govern the coverage and causation questions. However, it may still be argued under Cox, that if a covered peril causes a “constructive total loss” where demolition of the property is required by law, or the cost of repairs exceed more than 50% of the existing value of the building, a policyholder is entitled policy limits and should not be limited to the percentage attributed to the covered peril. This, of course, is the subject of heated litigation and coverage disputes. Luckily, I enjoy these tiffs.

Tune in next week when I will discuss “constructive total losses” under Florida’s VPL and more.

I am fortunate that Jean Niven works closely with me on my cases because she is extraordinarily thorough and prepared. She makes me look far better than what I am. We have a tremendously successful track record when working on projects together, primarily due to her efforts.

Regarding the subrogation speech, she put together the cases and basic outline of the speech. As I went through it, I remembered various instances where subrogation rights and issues became significant considerations of a first party claim. As I studied the issue and thought about these experiences, I recalled that subrogation provides significant opportunities to a policyholder that may soften the blow from uninsured losses.

The first rule from the policyholder's perspective is that subrogation should become a major consideration when significant uninsured losses occur. It is becoming more frequent that policyholders have such uninsured damage scenarios for a number of reasons. These include, but are not limited to:

1. High Deductibles.
2. Exclusions
3. Being Under insured.
4. Having limited amounts of coverage for certain types of loss.
5. Co-insurance penalties.
6. Gaps in coverage.
7. Non-Covered Property

The greater the uninsured loss, the more important for a claims handler to suggest that policyholder counsel be retained to orchestrate a procedure to recover uninsured losses. Our firm strongly suggests that policyholders retain their own counsel, even if it is solely to work out subrogation and litigation agreements with the insurer.

Ethically, we cannot understand how insurance retained counsel can approach a policyholder for dual representation. Yet, it is commonplace and probably a fertile field for malpractice because no attorney can serve competing masters. Indeed, it has been our experience that independent policyholder counsel can work hand in hand with the insurer's counsel far more productively and ethically than if one law firm is representing entities with competing interests in money and control of how the recovery will be attempted, distributed, and paid for.

A primary coverage issue for policyholders to be concerned about following a loss is to do nothing to waive or impair the insurer's right to subrogation. A typical subrogation clause reads:

In the event of any payment made hereunder, the Company shall be subrogated to the extent of such payment to all Insureds' rights of recovery thereof against any person or organization and the Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Insured shall do nothing after loss to prejudice such rights.

The problem with the clause in cases of uninsured loss is that the papers and agreements are not indicative of who gets what, in what order of preference, who pays for the expenses of legal fees and costs, who controls decisions of settlement, trial and arbitration, who pays for the insured's efforts to aid the insurer, etc. All these matters should be addressed in agreements that are subject to negotiation. It is legally complex because state laws vary on these issues. In some states and situations, policyholders may be giving away rights to free first reimbursement of uninsured losses by not retaining their own counsel to research and negotiate these issues.

Policyholders should also be concerned with "spoliation of evidence" needed to prove responsibility of third parties. Proper preservation of evidence is crucial in these situations. Insurer subrogation departments and policyholders should be urged to cooperate so that mitigation efforts do not destroy crucial evidence. Again, quickly obtaining counsel to orchestrate the loss scene recovery and contemplate claims against third parties is crucial.

Some teach about subrogation by trying to demonstrate all the different scenarios third parties cause, contribute to, or fail to prevent losses to the policyholder. I suggest that policyholders and their representatives first ask how significant the uninsured loss may be. The more that portion of the loss is uninsured for whatever reason, the more crucial it is to quickly retain counsel that can help orchestrate a plan for potential recovery. My experience is that such counsel can decide if it is best for the policyholder to work with the insurer and how those arrangements can be made. Often, counsel will work on a contingency fee basis and advance all costs towards the recovery.

So, in the end, I was pleasantly surprised at how much I enjoyed presenting views and teaching on this topic. Given that deductibles seem to be getting larger and larger, while coverages are becoming more limited, it is a fairly common occurrence for significant uninsured loss to take place. Thus, this area and topic of claims handling will become more important to policyholders, who may find themselves working closely with their property insurer to recover for losses.

A valued policy is traditionally defined as “one in which the value of the property insured is agreed upon by the parties so that in the case of a total loss, it is not necessary to prove the actual value to recover under the policy.” 44 Am. Jur. 2d Insurance §1500 (2009). Valued policy laws, or the so-called “total loss” statutes, were first enacted in the United States in the late 1800s, principally as protective measures for insureds. According to the annals of insurance history, the first VPL emerged in Wisconsin in response to a business practice of some fire insurance companies which, acting through their agents, bound policies in excess the value of the property at higher premiums, but when a loss occurred, the carriers would scale down the loss payment to the point of actuarial health and safety, thus over-collecting premiums and underpaying losses.

The Wisconsin farmers of the time were not happy. They were promised more insurable value for their farms and crops and gladly paid the higher premiums to protect their investments, only to be surprised by savings and short-changing clauses and hard fights over the actual value of their properties. Underwriters could not have lived in better times, but the farmers rose up in the name of indemnity, and the Wisconsin legislature adopted a law where, absent proof of crime and in the case of a total loss, a carrier would be forced to pay the bargained face-value of the policy. Many states followed Wisconsin’s grassroots movement. The underwriters panicked. Carriers soon fine-tuned their appraisal and property valuation formulas to protect themselves from the not-so-scrupulous farmers who were waging war on their over-insured policies and intentionally causing their losses. If you are reading this, you probably know that in this business both sides are equally intolerant of windfalls.

Today, over a third of the States have VPLs in place. While the nuances may vary from state to state, their historical purpose -- to liquidate the measure of the damages in the case of a total loss and protect the policyholder from protracted valuation disputes -- remains unchanged. In its pure form, VPLs force carriers to adequately pre-determine the value of the insured property at the time the policy is issued. The stated value becomes non-negotiable in the event of a loss, and the carrier cannot dispute the bargained value. The protections of a VPL are generally triggered in the event of: 1) a total loss 2) caused by a covered peril. However, if it were that simple, I would probably be more interested in football.

Modern concerns such as uncontrolled urban sprawling, drastic property value fluctuations, and the impact of unprecedented natural catastrophes have complicated VPLs. This is not to say that VPLs are toothless tigers in today’s loss adjustment environment. In the case of a total loss caused by a single peril, the application should be fairly simple. The Wisconsin farmers, however, would cringe over the complexities of modern claims disputes in the event of losses caused by multiple perils. A policyholder can recover pursuant to a VPL depending if he or she lives in a jurisdiction that favors the indemnity (insured recovers the full value of the policy even though the risk is worth less than the face value) or an “insurable interest value” jurisdiction (insured recovers the value of the risk at the time of the loss, not to exceed the amount stated on the policy), if his contract is not plagued with anti-concurrent causation (damage excluded regardless of its concurrent causation with a covered loss) and pro-rata liability clauses (computes percentage of liability among co-insurers), and whether the stars are all aligned the right way.

Join me next week as I attempt to demystify Florida’s current Valued Policy Law. In the meantime, enjoy the game.

According to the terms of most policies, a Proof must be submitted by the insured named on the policy. This means that while others, such as a public adjuster, may help the insured gather information necessary, if the Proof of Loss is submitted by anyone other than the insured, the insurer may have a valid reason for rejecting it.

Similarly, some states have statutes which require a Proof of Loss be submitted. Failing to comply with these statutes can create a variety of problems from providing the insurer with a potential reason to deny a claim and waiving any possibility of having attorney fees recouped for a successful action. For instance, Idaho Code § 1835 states:

(1) Any insurer issuing any policy, certificate or contract of insurance, surety, guaranty or indemnity of any kind or nature whatsoever, which shall fail for a period of thirty (30) days after proof of loss has been furnished as provided in such policy, certificate or contract, to pay to the person entitled thereto the amount justly due under such policy, certificate or contract, shall in any action thereafter brought against the insurer in any court in this state for recovery under the terms of the policy, certificate or contract, pay such further amount as the court shall adjudge reasonable as attorney's fees in such action.

In many instances there is more than one person named as insureds on a policy. Situations where a husband and wife are both named on the policy for the family’s home or where numerous partners of a business are named on a businessowners policy are becoming quite common. Thus questions arise about whether all of the insureds must submit a Proof. In many instances, a Proof of Loss submitted by one person named on the policy will be sufficient and will benefit the other insureds. Case law on this subject has found this to be applicable to spouses, business partners, and even family members in some instances. For example see Della Porta v. Hartford Fire Ins. Co., 500 N.Y.S.2d 831 (3d Dep't 1986)(holding that a proof submitted by one owner can be used for the benefit of other owners.) and U.S. Fire Ins. Co. v. Merrick, 171 Md. 476 (1937)(holding husband's signature on proof of loss and signing the name of his wife by himself sufficient where personal property was insured in the name of the husband and wife and the whereabouts of the wife who had left home were not known).

As with all things, however, you should always check your policy language and local laws to determine the exact requirements.

Much like the limitations on who may submit a Proof of Loss, there often are requirements which apply to the representatives of the insurer who may accept a Proof and where one should be mailed. The terms of the individual policy and applicable statutes will usually be controlling, however there are instances where there are no specific provisions which apply.

If this is the case, the general rule of thumb is that the Proof can be submitted to an agent or officer of the insurer. There is sometimes a question about whether the agent or officer has actual or apparent authority to accept the Proof, requiring a determination that is heavily fact intensive and often complicated. It is important to fully comply with the requirements to avoid later problems. For instance, the Tennessee Supreme Court found that mailing a Proof of Loss to the insurer’s local office did not satisfy the policy’s provision stating that a Proof should be mailed to the home office. Fisher v. Travelers Ins. Co., 138 S.W. 316 (Tenn. 1911).

In the end, many courts have been extremely strict when interpreting compliance with post loss obligations. Thus, a close study of the policy and the applicable law is imperative to ensure compliance with all provisions. If a policy is unclear or vague as to the exact requirements, it is always a good idea to get a written explanation from the insurer. This letter could be very useful if there is a dispute later.

As with my last post in this series, please keep in mind that the requirements under flood policies are much different, and failing to follow the flood policy procedures to the letter can result in disaster for your claim.

The Texas decision follows the Davis case cited yesterday, but adds an important limitation to how the replacement can be made. The rule everybody should follow in Texas when replacing at a different location is as follows:

Under the policy, [the policyholder] was permitted to replace the apartments with different buildings at a different site as long as the new buildings were devoted to the same use. For example, it could have purchased or built a larger apartment complex at a different location. See Davis v. Allstate Ins. Co., 781 So.2d 1143, 1144-45 (Fla.Dist.Ct.App.2001). The amount of Fitzhugh's recovery under the policy was limited to the cost of rebuilding similar or comparable buildings on the same site or the amount it actually spent to replace the property, whichever was less. See id.; see also Republic Underwriters Ins. Co. v. Mex-Tex, Inc., 150 S.W.3d 423, 425 (Tex.2004). For the replacement cost coverage to apply, however, [the policyholder] must have purchased or built a property that was functionally similar to the property that was destroyed. See S & S Tobacco & Candy Co., Inc. v. Greater New York Mut. Ins. Co., 224 Conn. 313, 617 A.2d 1388, 1390-91 (1992). If the new property is not functionally similar to the destroyed property, it is an unrelated expenditure and the destroyed property has not been "replaced."

How the Court got to this bottom line replacement cost rule only came about because the Texas policyholder did not replace the structure with a similar structure, but invested in property of a different use. The policyholder had damage to apartments, and invested in a partial ownership of industrial property.

The reasoning of the Court is important to understand how these cases are judicially viewed:

Unlike the act of giving an insurer notice of a claim or settling a claim without the insurer's knowledge, the replacement of damaged property is an event that triggers coverage. It is the act of replacing the property that causes the insured to suffer an additional loss for which he purchased additional coverage. To allow an insured to recover replacement costs in the absence of actual replacement would permit the insured to recover for a loss he has not suffered. See Harrington, 645 N.Y.S.2d at 224 (reasonable to deny recovery of replacement costs where insured is not going to replace property as he would profit from his loss). Accordingly, we conclude that Fitzhugh was required to replace the damaged property as a condition precedent to its recovery under the policy and that its failure to do so negates its entitlement to recover replacement costs.

For those readers who remember my post, Do Not Take Depreciation to Determine Actual Cash Value of Partial Loss to Real Real Property in Texas, you may wonder why Texas Courts are so concerned about policyholders obtaining “profits” in total loss situations and not mentioning that concern in partial loss situations where the repairs are not made. I am smiling while writing this because I wonder what those judges would say if they thought about that situation and were forced to academically explain how total loss situations differ from partial loss situations. For me, policyholders are generally required to pay the premium based on values at current replacement cost construction prices and should generally get replacement cost benefits unless the policy clearly prevents the same.

Nevertheless, the Fitzhugh 25 Partners court significantly noted what the term “replacement” of a structure contemplated when it was a requirement to obtain replacement cost benefits:

The word "replacement" is not defined in the policy. We must, therefore, give the term its ordinary and generally accepted meaning…. Webster’s New International Dictionary defines "replacement" as a "substitution" or "a new fixed asset or portion of an asset that takes the place of a discarded one."… For something to be a "substitution" or "take the place of" the original, it must serve the same function as the original. The vast majority of cases that have examined this issue have concluded that the term "replacement" inherently contains the element of functional similarity. See, e.g., SR Int'l Bus. Ins. Co. Ltd. v. World Trade Ctr. Props., LLC, 445 F.Supp.2d 320, 334 (S.D.N.Y.2006) (for rebuilt property to be replacement there must be "functional similarity"); Harrington, 645 N.Y.S.2d at 226 (new structure did not "replace" insured's home where insured did not live there); Conway v. Farmers Home Mut. Ins. Co., 26 Cal.App.4th 1185, 31 Cal.Rptr.2d 883 (1994) (term "replace" includes substituting an item that serves same function); Huggins, 423 So.2d at 150 (house was a "replacement" where it served same function as original). but see Ruter v. N.W. Fire & Marine Ins. Co., 72 N.J.Super. 467, 178 A.2d 640, 643 (1962) (replacement need not be identical to original or intended for same occupancy and use).

…

We note that Webster's also defines the term "replacement cost" as "the current cost of replacing a fixed asset with a new one of equal effectiveness."

…

We agree with Fitzhugh's contention that the policy's limitation on recovery of replacement costs to "the cost of repair or replacement with similar materials on the same site and used for the same purpose" is merely a method of calculating damages and not a requirement that Fitzhugh replace the apartment complex with substantially identical buildings at the same physical location. We disagree, however, with Fitzhugh's contention that it may spend the money it recovers under this measure of damages on anything it chooses. Such an interpretation reads the condition that the property be "replaced" out of the policy.

I am also smiling because while I write this post, I am reminded about what I wrote last week in Corban Part Three: A Win for Policyholders and a Decision Following Rossmiller's Causation Analysis of the Anti-Concurrent Causation Clause:

I live in a world where words, and the subtle understanding of them, mean much financially to everybody involved, including myself. I personally had millions of dollars on the line advancing the costs of lawsuits in Mississippi. I was very much a partner with my clients advocating for coverage.

For all future clients of mine, I would ask that you keep the investment in the replacement property as close as you can to the use of the property that was damaged. I can only predict, not guarantee, what these judges will think is “justice” when I present your best case to them.

My general rule is to file proofs of loss as soon as possible and within the time frames required under the policy. I am also aware that I vary from this rule based upon the particular matter and people involved. Often, many claims are resolved and no formal proof of loss is ever submitted because there is no request or the insurer simply waives the requirement. Still, not understanding how technical time requirements work in each jurisdiction may come back to haunt the policyholder.

A good example is in Georgia is Parris v. Great Central Ins. Co., 148 Ga.App. 277, 251 S.E.2d 109 (Ga.App., 1978) which follows the general rule that:

The insurance policy contains no express stipulation to the effect that failure to submit a proof of loss within 60 days of the loss will result in forfeiture. Nor was there an express stipulation in the policy that furnishing a proof of loss within the time specified shall be a condition precedent to the bringing of an action against the insurer. Therefore, maintenance of the suit on the policy will not be barred solely by reason of the failure to timely submit proof of loss within 60 days after the loss…

This is similar to the general rule Corey wrote in his post:

“If a policy of insurance provides that notice and proofs of loss are to be furnished within a certain time after loss has occurred, but does not impose a forfeiture for failure to furnish them within the time prescribed, and does impose forfeiture for a failure to comply with other provisions of the contract, the insured may, it is held, maintain an action, though he does not furnish proofs within the time designated, provided he does furnish them at some time prior to commencing the action upon the policy. And this has been held to be true even though the policy provide that no action can be maintained until after a full compliance with all the requirements thereof.”

Notice that tricky highlighted sentence. Georgia law shows how harsh the result can be when the full rule is provided and contemplated in terms of a short suit limitation clause:

The insurance policy contains no express stipulation to the effect that failure to submit a proof of loss within 60 days of the loss will result in forfeiture. Nor was there an express stipulation in the policy that furnishing a proof of loss within the time specified shall be a condition precedent to the bringing of an action against the insurer. Therefore, maintenance of the suit on the policy will not be barred solely by reason of the failure to timely submit proof of loss within 60 days after the loss so long as proofs of loss were furnished at least 60 days prior to the expiration of the contractual limitation period for filing. Farm Bureau Mut. Ins. Co. v. Bennett, 114 Ga.App. 623(2), 152 S.E.2d 609; … But see Harp v. Fireman's Fund Ins. Co., 130 Ga. 726(1), 61 S.E. 704 noting that in some jurisdictions, use of the word “unless” in the contract provision pertaining to “suit” is construed as a condition precedent to maintenance of suit demanding strict compliance.

This type of rule can be very harsh if there is a one year statute of limitations or suit limitation and a sixty day requirement to file a proof of loss. Thus, some states can effectively have a ten month time frame to file a proof of loss if such a rule is followed. Some require strict compliance. So, be careful and check out the state law you are dealing with regarding proofs of loss and time requirement for filing.

I indicated in a comment to a post, Nationwide Insurance Commercial Customers Should Check Their Policies for Dependent Property Lost Income Coverage:

Even if the Nationwide Underwriters reduce the Coverage, it may have no impact on customers of Nationwide since they have not been getting paid for it in the past. Maybe they will have to start paying it more as a result of greater awareness by public adjusters, adjusters, and customers.

Nationwide has made many changes to its policy forms limiting coverage. For example, many Nationwide commercial policyholders now have to fight much harder to get paid for water damage because of small wording changes to its policy which other insurers do not have in their policy.

In my opinion, insurers should not be advertising about "full protection" when their policies are not providing for it or their adjusters are not trying to make that happen after the loss occurs.

As the Liebel case demonstrates, Nationwide residential policyholders are having the same problem. But it is not just with Nationwide. I raised this point in Is the State Farm Policy Really Worth Anything?:

What is the value of insurance if it does not pay for insured losses? Imagine if you had a significant accidental water damage to your home or business, do you know whether your insurance company has your back? Will it really be there to help you? Don’t count on it. Today, modern insurance companies are re-writing their insurance policies to limit what is covered and excluding many losses that used to be covered under all-risk policies. State Farm, as an insurance industry leader, is leading the charge of making an insurance product that no consumer should trust as providing the amount of coverage the insurance product afforded 25 years ago. It is always important to remember that Policyholders Buy Insurance for Peace of Mind and Not Economic Advantage and that concept is being defeated as carriers try to gain economic advantage by changing small print in the policy that may have significant consequences discovered by the policyholder only after disaster happens. To be Fair And Balanced with State Farm, I could have substituted Allstate, Nationwide and USAA into the title.

It is apparent that most policyholders are being sold a defective insurance product. It promises coverage on a broad basis, but there is no peace of mind that many catastrophes will be covered. The following case is just another example of this fact. Until Departments of Insurance wake up to the idea that a minimum all risk policy needs to be mandated in the same manner the standard fire policy was early in the last century, the all risk insurance product will continue to erode from what it first covered over fifty years ago.

On February 14, 2003, Liebel noticed a wide gap between the floor and the wall in her living room. Over the following two and a half weeks, Liebel's living room floor began to sag and bend, and then every room of the home detached from the walls, and a wide crack formed in the middle of the living room. It turned out that the crack was caused a ruptured water line under Liebel's home, and the escaping water caused the soil beneath the home to erode, causing the foundation to settle, and the damage to Liebel's home. Liebel sought coverage for the damage under her all-risk homeowner's insurance policy with Nationwide.

Nationwide was not on Liebel’s side. Nationwide denied coverage for the damage, alleging that the loss was specifically excluded by the following exclusions in the policy:

1. We do not cover loss to any property resulting directly or indirectly from any of the following. Such a loss is excluded even if another cause or event contributed concurrently or in any sequence to cause the loss.

a) Earth Movement and Volcanic Eruption. Earth movement means: earth movement due to natural or unnatural causes, including mine subsidence; earthquake; landslide; mudslide; earth shifting, rising or sinking (other than sinkhole collapse). Volcanic eruption means: eruption; or discharge from a volcano.
* * *
3. We do not cover loss to property described in Coverages A and B resulting directly from any of the following:
* * *
e) Continuous or repeated seepage or leakage of water or steam over a period of time from a heating, air conditioning or automatic fire protective sprinkler system; household appliance; or plumbing system that results in deterioration, rust, mold, or wet or dry rote [sic]. Seepage or leakage from, within, or around any shower stall, shower tub, tub installation or other plumbing fixture, including their walls, ceilings or floors, is also excluded.

Liebel argued that the loss was covered based upon the following provision of the policy:

If loss caused by water or steam is not otherwise excluded, we will cover the cost of tearing out and replacing any part of the building necessary to repair or replace the system or appliance. We do not cover loss to the system or appliance from which the water or steam escaped.

f) (1) wear and tear, marring, deterioration;

If any items f)(1) through (7) cause water to escape from a plumbing, heating, air conditioning or automatic fire protective sprinkler system or household appliance, we cover loss caused by the water not otherwise excluded. We also cover the cost of tearing out and replacing any part of a building necessary to repair the system or appliance. We do not cover loss to the system or appliance from which the water escaped.

Under exclusions 3.a) through 3.f), any loss that follows is covered unless it is specifically excluded.

In deciding the case, Florida’s Fourth District Court of Appeal explained the classic rules of insurance policy interpretation. In Florida, insurance contracts are interpreted according to the plain language of the policy. However, if the terms of a policy are amenable to two or more reasonable interpretations, one that provides coverage and one that does not, the policy is considered ambiguous. Ambiguous coverage provisions are interpreted against the insurer that drafted the policy and in favor of the insured. Further, the Court noted ambiguous “exclusionary clauses are construed even more strictly against the insurer than coverage clauses.” The Court also noted the failure of a policy to define a certain term does not make the policy ambiguous; when the insurer has not defined a term, the common definition prevails.

Applying these rules to the policy, the Fourth District held that the plain and unambiguous language of the policy’s earth movement exclusion excluded from coverage the damage to Liebel’s home. The policy specifically excluded “loss to any property resulting directly or indirectly” from “earth movement due to natural or unnatural causes.” “Earth movement” included “earth shifting, rising, or sinking.” Liebel, 2009 WL 3189332 at *4. As the loss to Liebel's home was caused by the shifting of earth under the home, which was caused by earth shifting from unnatural causes, the water line rupturing, the loss was specifically excluded from coverage.

However, the Court agreed with Liebel's contention that the cost of repairing the water line was covered by the policy. Because the policy stated that it did not cover damage caused by water from a plumbing system that was otherwise excluded, but then stated that it covered the cost of repairing a system that caused water damage, the policy was ambiguous because there were two reasonable interpretations of the provisions.

Specifically, one may interpret the “otherwise excluded” language to preclude coverage for all damages caused by a matter otherwise excluded, including the cost of tearing out and replacing any part of Liebel's home necessary to repair the ruptured water line. In contrast, a reasonable person could interpret the Policy to exclude from coverage the damage caused by earth movement, but include the cost of repairing the water line that caused the loss, as it is a plumbing system that caused water damage due to its deterioration from wear and tear.

Liebel, 2009 WL 3189332 at *6. Following the principle that ambiguities in insurance contracts are construed in favor of the insured, the Court held that the cost of tearing out the floor and repairing the water line was covered by the policy. The Court noted that this finding was supported by the principle that an all-risk policy covers a loss unless that loss is specifically excluded; the policy did not specifically exclude the cost of repairing a plumbing system from coverage, it only specifically excluded damage caused by earth movement.

As discussed in the previous post, What is a Proof of Loss, and What Purpose Does it Serve?, many times filing out a proof of loss can be a prerequisite for recovery. Sometimes failing to submit a Proof of Loss may be grounds for the insurer to deny coverage for the loss. The first place to look to see what your obligations are in regards to submitting a Proof of Loss is the policy. Some policies specifically state that an insured’s failure to submit a Proof of Loss may void coverage under the policy and some do not. Courts have looked at these disputes on a case by case basis. If the policy states that a Proof is required, then the insured may be voiding coverage by failing to do so.

If the policy does not state that failing to submit a Proof of Loss will void coverage, some courts have not been willing to find that an insured’s claim can be denied simply by failing to submit one. For instance, in Continental Fire Ins. Co. v. Whitaker & Dillard, 112 Tenn. 151 (Tenn. 1904), a Tennessee court stated:

If a policy of insurance provides that notice and proofs of loss are to be furnished within a certain time after loss has occurred, but does not impose a forfeiture for failure to furnish them within the time prescribed, and does impose forfeiture for a failure to comply with other provisions of the contract, the insured may, it is held, maintain an action, though he does not furnish proofs within the time designated, provided he does furnish them at some time prior to commencing the action upon the policy. And this has been held to be true even though the policy provide that no action can be maintained until after a full compliance with all the requirements thereof.

The Court’s opinion in Continental is in line with cases from numerous other jurisdictions including West Virginia, Michigan, Pennsylvania, and Kentucky. While these rulings stand for the premise that a policy may not be voided for failure to submit a Proof of Loss, they do not mean that a Proof does not ever have to be filed. A Proof of Loss is still a prerequisite for recovery; an insurer may not deny a claim simply because it is not filed within the specific time frame allotted.

Courts also sometimes focus on whether the insured has substantially complied with the policy provisions and what prejudice has resulted from the insured’s actions. If the policyholder has made a good faith effort to comply with the Proof of Loss requirements and there has been no prejudice to the insurer because of a minor technicality, courts are more reluctant to find that the policy has been breached. See for instance, Walker v. American Bankers Ins. Group, where a court found that an insured has substantially complied with the proof of loss provisions if they have submitted enough information to:

afford the insurer an adequate opportunity for investigation, to prevent fraud and imposition upon it, and to enable it to form an intelligent estimate of its rights and liabilities before it is obliged to pay.... to furnish the insurer with the particulars of the loss and all data necessary to determine its liability and the amount thereof. Walker v. American Bankers Ins. Group, 108 Nev. 533, 537 (Nev. 1992).

In Walker, the Court went on to say that the insured had substantially complied with his Proof of Loss obligations by submitting a one-page, unsigned and unsworn, list to the insurer within the time frame allowed under the policy. This was a far cry from what the insurer contemplated when it asked for a Proof of Loss, but the Court found that it was close enough to serve the overall purpose of the obligation.

Many times there will be a problem with the technicalities which makes the Proof incomplete. Some of the most common mistakes include the insured’s failure to sign, failure to notarize, or failure to provide the insurer with the necessary supporting information. In these instances, the insurer will likely reject the Proof of Loss. When such a rejection takes place, the insurer should notify the policyholder that the proof has been rejected and what steps must be taken in order to fix the problems. In most instances, the policyholder can easily make the necessary changes and the insurer will likely accept the Proof.

In the end, we are all human and mistakes happen. While there are many different reasons for which an insurer might reject a Proof of Loss, a disagreement as to the amount of damages contained in the Proof is usually not one of them. This does not mean that submitting an inaccurate Proof of Loss is not a reason that an insurance company might attempt to avoid coverage. In situations where there are incorrect statements in the Proof, courts often look at the nature and circumstances of the error and attempt to determine the insured’s intent.

If the insured filled out the Proof of Loss in good faith and the insurer was not prejudiced by the mistake, courts tend to find that coverage has not been voided. As with other aspects of the policyholder’s duties following a loss, however, if the insured’s errors are not made in good faith or are attempts to defraud the insurer, the insurer may have a valid defense to avoid coverage.

The old adage “if something is worth doing, it is worth doing right” undoubtedly applies to the creation and filing of a proof of loss. By acting in good faith to comply with the post-loss obligations under the policy, the policyholder can avoid many common pitfalls and move their claim along more quickly.

Please take note that the requirements under the National Flood Insurance Program (NFIP) Policies are much different and much of this does not apply. To hear about that, however, you will have to check back in the weeks to come.

With respect to the “all-risk” coverage of “Coverage A - Dwelling” and “Coverage B - Other Structures,” the Corbans are required to prove a “direct, physical loss to property described.” Thereafter, USAA assumes the burden to prove, by a preponderance of the evidence, that the causes of the losses are excluded by the policy, in this case, “[flood] damage.” USAA is obliged to indemnify the Corbans for all losses under “Coverage A - Dwelling” and “Coverage B - Other Structures” which USAA cannot establish, by a preponderance of the evidence, to have been caused or concurrently contributed to by “[flood] damage.” “Contributed to” comes into play only when “[flood] damage” is a cause or event contributing concurrently to the loss. Pursuant to the policy language, only if proof of a “concurrent” cause is presented to a jury for consideration would the jury receive an instruction including the policy phrase “contributing concurrently.

This ruling confirms State Farm’s Wind/Water Protocol is the wrong test under Mississippi law because it improperly shifted the burden upon the policyholder to prove that the wind caused the damage rather than the insurer having to prove that the damage was excluded. Corban undermines the Fifth Circuit reversal of Judge Senter in Broussard vs. State Farm and as I suggested in Broussard's Bad Faith Decision Impaired by the Mississippi Supreme Court.

There is one important mistake the Court did make in its decision when it held:

With respect to the “named perils” coverage of “Coverage C - Personal Property,” the Corbans are required to prove, by a preponderance of the evidence, that the “direct physical loss” to the property described in Coverage C was caused by wind.

There is no named peril of “wind.” Policies have always required the policyholder to prove damage by the named peril of “windstorm.” In insurance lore and law, there is a big distinction. The most significant for Katrina victims is that a hurricane is a “windstorm.” The policyholder can easily prove that.

The St. Petersburg Times reported that the Department of Insurance is supportive of the plan and that the new insurance companies taking over the policies are sufficiently strong despite recent downgrades:

Tom Zutell of the Florida Office of Insurance Regulation said the state appreciated that Nationwide arranged for a "soft landing" with Tower Hill. Customers always have the option of seeking other insurers, he said.

A.M. Best Co. recently downgraded the financial strength ratings of three property insurers associated with Tower Hill Insurance Group from B (fair) to D (poor). The ratings agency said it was concerned about the companies' hurricane exposure and whether they had sufficient reinsurance to handle claims from a severe hurricane.

State regulators, however, said they had no concern about Tower Hill's financial viability. Zutell said the company is constantly monitored, as are all insurers. He noted the company received an A (exceptional) from another ratings agency, Demotech Inc.

Yesterday, I read a proposed Nationwide policy that would cover both Windstorm and Flood. This was presented to the National Association of Insurance Commissioners at it September meeting. Nationwide's plan calls for the federal government to act as a re-insurer of the policy.

The large national multi-line insurers are lobbying for such a policy while placing market pressure on such a plan by removing themselves, or threatening to so, from coastal areas in the Gulf Coast and Atlantic Coast.

The times they are a changing.

Prudential Property vs. Swindal, 622 So. 2d 467 (Fla. 1993), is a Florida Supreme Court case in which the Court held that policies are read by their plain language, with terms and words which are undefined in the policy being defined by their plain everyday meaning. In Koikos vs. Travelers Ins., 849 So. 2d 263 (Fla. 2003), the Florida Supreme Court added the phrase, “plain everyday meaning as would be understood by an ordinary person.” Further, in Excelsior Ins. v. Pompano Park, 369 So. 2d 938 (Fla. 1979) the Court also stated that courts may not write terms and conditions into policies that do not exist in the plain language.

These cases may be Florida-centric, but you’ll find counterparts to these cases in just about every state in the country. That is because policies are really contracts, and it is standard under existing law in the United States that contracts are read by their plain and everyday language. In addition, “blue-penciling” (legal jargon for courts crossing out or writing in language in a contract) is almost universally disfavored. As such, the plain policy language controls its terms and conditions, including, but not limited to, post-loss obligations and EUO clauses.

Now I know what many people reading this blog are thinking, “Policy language? Who wants to read the policy language?” And I empathize and agree; reading insurance policies is not fun. If it was there would be a section down at the local Borders entitled, “Insurance Policies,” where they could be purchased for non-fiction reading. But I implore all industry professionals out there: READ THE POLICY. There is a plethora of useful information in the text, and it is amazing how many times insurance companies demand actions which are beyond the language of their policies.

Most residential policies say something along the lines of: “You must sit for an examination under oath at our request outside the presence of any other insured, and sign the same.” Additionally, the definition section of most residential policies defines “you” as, “Any named insured and the spouse of any named insured residing at the resident premises.” That’s pretty clear. That is, if the policy has this language, or a reasonable facsimile thereof, only named insured and the husband/wife of a named insured living at the insured residence may be forced by the insurer to submit to an EUO. No sons, no daughters, no aunts, no uncles, no public adjusters, not your friend Eddie who dropped the pan-full of water on the floor and chipped the tile: just the named insured and spouse of the named insured residing at the residence premises. Period.

With that being said, however, some policies are a little trickier. For example, I’ve seen State Farm residential policies which say that if the policyholder is going to rely on or defer to employee’s or expert’s opinions, the policyholder must assist the insurer in producing those employees or experts for EUO as well. Thus, if the insured is going to point to their public adjuster and/or the estimate produced when questioned about the damage or valuation of damage, for example, under this policy language, then the public adjuster would have to be sworn in answer questions as well. Of course, in this scenario, I argue that under the policy’s plain language, the PA need only answer questions in the area(s) in which the policyholder has deferred to the PA. Further, since the PA is not an insured, the insurer has no right to demand that the insured and PA be separated for questioning. This usually drives defense attorneys crazy, but I tell them, “YOUR CLIENT wrote the policy!”

Furthermore, some Royal Palm policies specifically include the right of the insurer to demand the PA’s EUO. Moreover, many commercial policies say: “The insurer has the right to examine any insured under oath, outside the presence of any other insured, as many times as they reasonably require.” Thus, any insured, as defined by the policy, in this instance may be called for EUO. The moral to this story is: read the policy language. It will tell you who may be compelled to submit to an EUO and, often times, it can stop the insurer that is simply asking for its policyholders and their agents to jump through imaginary hoops which do not exist in the policy’s plain language. Of course, if insurers do demand actions of the policyholders not stated in the policy, there is insurance jargon term for that, too: Bad Faith.

Tune in next week insurance fans when we discuss Under What Circumstances Can a Policyholder Refuse to Answer a Question at an Examination Under Oath and Not Lose Policy Benefits?

His article concerning the Loss Payment Clause is about a fairly standard provision found in all commercial and residential insurance policies. It usually provides:

Loss Payment. We will adjust all losses with you. . . . Loss will be payable:

a. 20 days after we receive your proof of loss and reach agreement with you; or

b. 60 days after we receive your proof of loss and

(1) there is an entry of a final judgment; or

(2) there is a filing of an appraisal award with us.

David argues that the clause should be interpreted to mandate payment of the undisputed or agreed to amounts of the loss:

The loss payment provision must be interpreted to mean that once an insured has submitted a properly executed sworn proof of loss (POL) statement, the insurer has a certain number of days to tender the undisputed amount of benefits. Insurers argue that the provision implies an obligation to pay benefits only after there is an "agreement" between it and the policyholder.

Taking this argument to its extreme, the insurer would never be obligated to pay benefits as long as it disagreed with the POL's claimed amount, in part or whole. Under such a contract, the insurer could collect premiums from the policyholder but never have a contractual obligation to perform any duties, unless it expressly agreed to them.

A more reasonable interpretation of the loss payment provision is that on submission of the POL, if the claimed amount exceeds the insurer's damage estimate, the insurer is obligated to tender undisputed benefits in agreement with the policyholder, leaving the balance as disputed.

Certainly, insurance companies acting in good faith should pay all amounts undisputed as promptly as possible and most do. I cannot imagine an equitable reason which would allow a debtor to hold onto monies agreed to as owed. The inequitable reason to do so is for leverage of the disputed amount. Replacement cost policies certainly contemplate prompt payment of undisputed amounts because most have time requirements for actual replacement. Some states now have penalties for insurers that do not promptly pay agreed amounts of loss.

The Merlin Law Group is very proud of what David has accomplished and for his continued development as a policyholder leader. Here is the article in full.

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.

The sources for my information are former Nationwide Executive General Adjuster Scott Eich and Commercial Large Loss Adjuster Dennis James, as well as interviews with various Nationwide policyholders, adjusters and public adjusters. Eich told me of a story concerning the underpayment and ignorance by Nationwide adjusters and claims management concerning this form of coverage to a fast food franchise.

Apparently, nobody in the claims department at Nationwide taught its adjusters how to inform Nationwide policyholders about this very valuable coverage. Nationwide claims executives intentionally fail to teach their catastrophe and claims adjusters about how this obscure policy provision works.

Scott Eich should know. He was a Subject Matter Expert for Nationwide and helped develop commercial training at Nationwide Insurance Company until he left Nationwide in 2006.
In reflection, he said virtually every business owner that has lost income following a catastrophe should have a dependent property claim investigated because it probably is covered---regardless if the Nationwide customer suffered any physical damage at all.

The point I want to make is that as an obligation of good faith, an insurer must train its claims adjusters about the benefits of the policy so adjusters can intelligently investigate for those damages and inform the policyholder of the benefits. How fair would it be for an insurer to intentionally not train its adjusters so benefits are never paid, and allow otherwise recoverable benefits to go uncollected? This is the effective result of feigned ignorance at Nationwide because no claims personnel understood how the policy worked regarding this coverage. I am certain the underwriters knew and agents should know as well.

Thinking about Nationwide's general claim philosophies, I wonder how many millions (if not billions) of dependent business income coverage benefits have gone unclaimed from Hurricanes and other natural catastrophes over the past decade. I would not be surprised if some major class action law firms do not read this post and try to rectify this situation soon. Maybe Nationwide will contact their customers to correct this underpayment situation and make restitution to business policyholders in catastrophe areas.

Most commercial insurance companies write "dependent" or "contingent" business income coverage as additional coverage under an endorsement. Nationwide has it in the primary business policy, and it is not subject to any policy limits other than the loss of income be incurred within twelve months of the other person's damage.

The key to this type of coverage is to remember the Insurance Company pays its policyholder for its loss of income because of damage to other people's, businesses' and governments' real and personal property. Fulcrum consultants indicate this on its website:

Contingent Business Interruption

If your business has key suppliers or customers affected by a disaster, your business could have insurance for this business interruption. This is true even though your own business property may not have sustained physical damage. This frequently occurs because of (i) strategic supplier and customer relationships, (ii) outsourcing agreements, and (iii) just-in-time inventory systems. If included in your policy, contingent business interruption covers losses caused when key suppliers or customers experience a disaster that also affects your business. Contingent insurance occurs when the physically-damaged property is NOT owned, operated or controlled by the insured. The contingent property may be specifically named, or the coverage may blanket all suppliers and customers. The type and cause of physical damage must be the same as insured under the controlling policy. The actual coverage will depend upon your policy language...

The Nationwide policy provides the coverage on a blanket basis. Essentially, hurricane damage to property owned by others who are customers of Nationwide's policyholder which result in loss of income to the policyholder results in a covered claim. The definition of dependent property is very broad under Nationwide's policy. I am certain there are many business owners with Nationwide that have lost money in many catastrophe areas that are ignorant that their policy will help soften that financial blow
 

Since my practice is a little more national in scope than Bob’s (he has so much work in Florida he cannot get away) I conducted some more widespread research on his topic. In my practice, I have clients who own property all over the country and the world. I kept thinking that if my client owned property in Chicago, but lived in Timbuktu, a court may reasonably find that the client had to go to Chicago for an examination. “Timbuktu” is a relevant geographic place depending on the circumstances of where you are from and how small the world is for any policyholder. What is “reasonable” is a nebulous concept subject to extreme differences of opinion, even if it is the primary standard for determining where one can be obligated to show up for an examination under oath.

Policies are usually ambiguous as to where the examination or sworn statement must be held. Most language is somewhat similar to this:

The insureds, as often as may be reasonably required, shall exhibit to any person designated by this Company all that remains of any property herein described, and submit to examinations under oath by any person named by this Company, and subscribe the same; and, as often as may be reasonably required, shall produce for an examination all books of account, bills, invoices and other vouchers or certified copies thereof if the originals be lost, at such reasonable time and place as may be designated by this Company or its representative, and shall permit extracts and copies thereof to be made.

“Reasonable time and place” is not exactly apparent in complex commercial losses. For example, if a loss happens in a manufacturing facility in Tennessee, which belongs to a corporation headquartered in Tokyo, whose American finance operations are in New York, where can the insurer examine corporate representatives pertaining to issues of business income and extra expense? What is reasonable to the insurer may be extraordinarily frustrating to a risk manager; who pays the cost of transporting employees internationally? Of course, they ask me, “Chip, do we have to put up with and pay for this?” Most corporate clients do not want an “I dunno” answer—although that may be the best answer when the test is one of a “reasonable place” and the failure to comply penalty is no payment for an otherwise legitimate claim.

Since I represent the policyholder, I love an old Washington case, Pierce v. Globe & Rutgers Fire Insurance Company, 107 Wash. 501, 182 P. 586; (Wash. 1919), which holds that an examination more than 25 miles from the property damage is not enforceable:

The place where the loss occurs is the proper place for the examination, and neither the insurance company nor the insured has the right to demand that it shall take place elsewhere.

That rule may help in most cases, but I wonder if all the property examinations pertaining to Mt. Saint Helens were conducted in catastrophe zones if access could only be gained by helicopter? I could imagine some of my ingenious insurance opponents citing the language about “neither” party being able to change the location as an excuse to do so and demand my client somehow gets there. Usually, the twenty five mile rule from the location of the loss is pretty good to follow as a “reasonable” place.

Of course, the same result can be very bad for the policyholder if he or she owns property in a far away place, as demonstrated in the old case of Fleisch v. Insurance Co. of North America, 58 Mo.App. 596 (1894). There the insured, a resident of New York City, obtained insurance on his stock of goods situated in Missouri, from a Missouri corporation. The policy required that, in case of loss, the insured should submit to an examination under oath touching all matters relating to the claim and the cause of loss. The Missouri court held that the New York insured was required to present himself for the examination to the company's adjuster in Missouri. The refusal to submit to an examination outside of New York City was a violation of the policy. I would suggest that in 1894, Missouri was about as far from New York City as Timbuktu is from Chicago today.

Illinois courts may be a little more lenient with policyholders than those in Missouri. In American Cent. Ins. Co. v Simpson, 43 Ill App 98 (1892), the insurer sought to examine the insured under oath in another state. The insured declined to appear. The court stated that the insurer had no right to require the insured to bring his books and go to the office of the insurance company in another state to be subjected to an examination under oath. The court reasoned that persons insured would be harassed, and the expense of traveling to the general office of the insurance company was such that the benefit that the insured would derive from the insurance would be destroyed. The court rejected the insurer's contention that the insured could not recover because he had not substantially complied with the terms and conditions of the policy.

A New York court found that New York was a reasonable place to have the examination under oath despite the insured residing in Liberia and having business in Liberia. Ayuob v American Guarantee & Liability Ins. Co. 605 F Supp 713 (1985, SD NY), applied New York law and rejected the contention that New York was not a reasonable place to hold the examination. The court noted that the policies explicitly stated that the insured “shall appear at such reasonable time and place” as may be designated by the insurer. The court pointed out that Liberia was not the only reasonable location at which the examinations could have been held, and that local conditions in Liberia, including lack of facilities and political unrest, provided further reason why its suitability as a location for the examination was questionable. The court stated that as to those insureds who actually came to New York, or agreed to come, for whatever purposes after the alleged loss, that New York was not an unreasonable site for the examination. As to one insured who neither came nor agreed to come to New York, the court directed him to submit himself for examination in New York, gave him the right to demonstrate the infeasibility of his coming to New York and to suggest some other place, other than Liberia, where he could be examined.

The lesson from all this is that some judges may think that a “reasonable” place is a lot different than what a policyholder may find as reasonable. My experience is that most insurance defense counsel love to take examinations under oath in cities where there is something a lot more fun to do before and after the examination than in Timbuktu. I recently handled a significant Houston commercial loss, with the examination under oath held in our Tampa office. I bet the reasonableness of that location had something to do with my suggestion that the best wine cellar in North America is at Bern’s Steakhouse, a few minutes away from our office conference room overlooking Tampa Bay.

An attorney colleague of mine, Arden Lea, asked me to co-counsel with him on a case where the cooperation clause was a central issue. He coined a phrase which I often use and teach regarding the definition of cooperation. He indicated that it does not mean “slavish obedience.” He is right. If you seek a definition of the word “cooperation,” the idea of those working together, such as in a team, for a mutual benefit seems to best define the word. If the insurer had placed the word “obey” into the policy, the entire purpose of the mutual good faith performance of an insurance policy would be changed.

A case decision last month, Coconut Key Homeowners Ass'n v. Lexington Ins. Co., No. 08-60640, 2009 U.S. Dist. LEXIS 83652 (S.D. Fla. Aug. 28, 2009), demonstrates the very high burden that insurance companies have to prove regarding the policyholders failure to cooperate before coverage is denied on that basis.

The alleged failure to cooperate apparently centered on the condominium not providing access to all the units damaged by wind. Here is what the Court found regarding the “cooperation clause” and burden of proof required to show a breach of such a requirement:

Most insurance policies have "cooperation clauses" providing that the insured "shall cooperate with the insurer, attend hearings and trials upon the insurer's request, and shall assist in effecting settlements, in securing and giving evidence … and in the conduct of suits."… Cooperation clauses are less onerous on insured parties because courts will reject defenses based on alleged material breaches of cooperation clauses if the insurer cannot demonstrate "substantial prejudice" from the breach. While "an insurer need not show prejudice when the insured breaches a condition precedent to suit,"… the burden is "on the insurer to demonstrate substantial prejudice before a breach [of a cooperation clause] would preclude recovery under the policy."…

Case law regarding insurance policies indicates the inspection provision at issue in this case is a cooperation clause. First, the inspection provision helps Lexington obtain evidence, which is one of the key purposes of cooperation clauses identified above. Second, Lexington has not presented a case indicating that inspection provisions are typically considered to be a condition precedent, nor has the Court identified any Florida case suggesting Lexington's assertion that the provision is a condition precedent could be correct. Finally, the rule that "policy provisions limiting liability are to be construed in favor of the insured," State Farm Fire and Cas. Co. v. Metropolitan Dade Cty., 639 So.2d 63 (Fla. 3rd DCA App. 1994), weighs in favor of holding the provision is a cooperation clause because a holding that the provision is a condition precedent would make it harder for Coconut Key to recover.

As a result, to prevail on its motion for summary judgment, Lexington must show as a matter of law 1) that Coconut Key materially breached the inspection provision, and 2) that Lexington has been substantially prejudiced as a result of that breach. (emphasis added)

The fact pattern and issues of cooperation seem growing and numerous in other cases that I am aware. Condominiums are trying to prove that windstorm damages occurred and insurers are trying to disprove the same. Accordingly, the facts the Court noted are also important for many fighting damages in hurricane or other windstorm claims:

Here, Coconut Key has presented sufficient evidence for the jury to decide whether it has sufficiently cooperated with Lexington to allow Lexington adjusters to inspect the premises. The parties do not dispute that Coconut Key has extended invitations for re-inspection four times. Furthermore, the record presented to the Court indicates the blame for Lexington's inability to access units lies chiefly with unit owners and there is no evidence that Coconut Key can compel the owners to assist Lexington. As a result, Lexington has not shown as a matter of law that Coconut Key has materially breached the inspection provision.

…

Even if it could demonstrate Coconut Key's material breach as a matter of law, Lexington could not prevail unless it could also establish substantial prejudice resulting from its inability to access the units at issue. While it may be possible that Lexington needs access to the units at issue to address particularly contentious damages issues, Lexington has not offered any evidence showing that a meaningful amount of Coconut Key's damages are located in the inaccessible units or explained why it must access each and every unit to respond effectively to Coconut Key's claims. Furthermore, Lexington's assertion that it has not found any additional damage to unit interiors during re-inspection tends to shows that its inability to access the remaining units has had little impact on its assessment of Coconut Key's claimed damages. Accordingly, Lexington's motion also fails because it has not come forward to demonstrate substantial prejudice. However, if it chooses to do so, Defendant obviously still can present evidence on this issue at trial.

I suggest that policyholders work with the insurance company to provide information for the insurer so that payment can be made as quickly as possible. Similarly, insurance adjusters should work with and assist the policyholder to get as many benefits which are owed to the policyholder following the loss.

It is my impression that there is a growing trend in claims where delay ensues; the policyholder asks for money; months go by; and then the insurance company demands all kinds of information and access that it should have started on Day One. Then, when the policyholder asks why the insurance adjuster did not ask for the information or do the work much sooner, the question is answered with a harsh letter threatening a lack of coverage for a long list of reasons which include the failure to cooperate.

While not the case all the time and maybe I would have a different impression if I were an adjuster, it seems that many adjusters are not being taught that cooperation means working with, and not against, the customer of the insurance company.

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.

As I have mentioned in previous posts, there are a few insurers that consistently provide the coverage and customer service they promise

The survey also confirms what those of us in the property insurance industry already knew, Allstate is not living up to its advertised promises or its customers’ expectations.

Admittedly, the Consumer Reports article did not discuss whether some customers were partially to blame for their dissatisfaction with their insurers. Even the best insurance is truly beneficial only when the right coverage is purchased. Likewise, even if a consumer does not have access to the top three insurers, by carefully reviewing the policy with an understanding of the relevant terms and exclusions, he or she can buy great coverage. Some previous posts (Spring Storms and Tornadoes in Mississippi Serve as a Reminder: Review and Update Your Policy for Overlooked Benefits; Three Factors Homeowners Must Consider When Updating their insurance for hurricane season) have explained the terms and necessary coverage.

Their final advice cannot be overstated:

Read your policy and any other correspondence. Ask your agent to explain anything you don't understand.

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.

The series will discuss the practical, legal and coverage aspects of the following articles we have lined up for you each Wednesday for the next thirteen weeks:

1. Examinations and Sworn Statements Under Oath: What Are They and Their Relevance to Insurance Coverage From a Historical Study of Older Cases
2. What Happens if A Policyholder Does Not Attend an Examination Under Oath?
3. Where Do and Can Examinations Under Oath Be Held? Does a Policyholder Have to go to Timbuktu?
4. Who Can Be Compelled to Attend Examinations Under Oath? Do Public Adjusters, Contractors and Employees Have to Attend Examinations Under Oath?
5. Under What Circumstances Can a Policyholder Refuse to Answer a Question at an Examination Under Oath and Not Lose Policy Benefits?
6. The Practical Reasons Insurers Take Examinations Under Oath and Why Policyholders Need Representation By Legal Counsel
7. What is the Impact of a Wrong Answer at an Examination Under Oath? Do all Incorrect Answers Lead to Denial?
8. How to Prepare for an Examination or Sworn Statement Under Oath if You are a Policyholder or Public Adjuster.
9. What Public Adjusters Need to Tell Their Clients About Examinations Under Oath and Why Public Adjusters Need to Be Careful About Giving Legal Advice.
10. The Examination Under Oath is Over: What Now?
11. Typical Questions Asked During an Examination Under Oath of an Arson or Suspicious Fire Case.
12. Typical Questions Asked During an Examination Under Oath of a Questionable Theft Loss.
13. Typical Questions Asked During an Examination or Sworn Statement Under Oath of a Disputed Structural or Personal Property Valuation Claim Suspected of Being Inflated, Exaggerated, or Made Up.

For those that have not studied the examination under oath clause, it is one of the few property insurance clauses to be specifically addressed by the United States Supreme Court. In Claflin v. Commonwealth Insurance Company, 110 U.S. 81, 94-95; 3 S. Ct. 507, 515; 28 L. Ed. 76, 82 (1884), the Supreme Court stated:

The object of the provisions in the policies of insurance, requiring the assured to submit him-self to an examination under oath, to be reduced to writing, was to enable the company to possess itself of all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights, to enable them to decide upon their obligations, and to protect them against false claims. And every interrogatory that was relevant and pertinent in such an examination was material, in the sense that a true answer to it was of the substance of the obligation of the assured. A false answer as to any matter of fact material to the inquiry, knowingly and willfully made, with intent to deceive the insurer, would be fraudulent.

In Claflin, the insured’s false statements during the examination under oath were not made to deceive the insurer, but to cover-up false statements previously made to other parties. Nevertheless, the Supreme Court held the false statements regarding the ownership and value of the insured goods were material, and therefore, a breach of the conditions of the policy and a bar to recovery.

...it is no palliation of the fraud that Murphy did not mean thereby to prejudice them [the insurer], but merely to promote his own personal interest in a matter not involved in the contract with them. By that contract the companies were entitled to know from him all the circumstances of his purchase of the property insured, including the amount of the price paid and in what manner payment was made; and false statements, willfully made under oath, intended to conceal the truth on these points, constituted an attempted fraud by false swearing which was a breach of the conditions of the policy, and constituted a bar to the recovery of the insurance.

Id. at 97.

For a number of practical and legal reasons, any policyholder being asked to undergo an examination under oath should always hire insurance coverage counsel and carefully consider who that counsel is going to be. I would suggest that opposing insurance company counsel and claims managers consider who the legal opponent will be if a denial is contemplated.

Good, experienced and reputable policyholder attorneys add value to claims and sometimes prevent claims disasters and litigation from ever occurring.

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.

Let me give you the Reader’s Digest version of this analysis. The relevant policy language is fairly standard in most homeowner policies. The language regarding “collapse” caused by a “windstorm” is significant to this claim. “Collapse” is usually excluded under many insurance policies. However, it is then granted back as an additional coverage because it is “excepted” out of exclusions. This exception to the exclusions only happens if the “collapse” is caused by certain causes. One of those causes is “windstorm.” If a “hurricane” is a “windstorm,” and hurricanes are a combination of wind and flood, the logical reading of the policy is that hurricanes that cause complete destruction will provide coverage because the collapse language excepts the damage out of the “flood” exclusion.

Here is the relevant language from a standard State Farm policy:

SECTION I – ADDITIONAL COVERAGES

* * *

11. Collapse. We insure only for direct physical loss to covered
property involving the sudden, entire collapse of a building or any
part of a building.

Collapse means actually fallen down or fallen into pieces. It does
not include settling, cracking, shrinking, bulging, expansion,
sagging or bowing.

The collapse must be directly and immediately caused only by one
or more of the following:

a. perils described in SECTION I – LOSSES INSURED,
COVERAGE B – PERSONAL PROPERTY. These
perils apply to covered building and personal property for
loss insured by this Additional Coverage;

* * *

SECTION I - LOSSES INSURED

COVERAGE A – DWELLING

We insure for accidental direct physical loss to the property described in
Coverage A, except as provided in SECTION I - LOSSES NOT
INSURED.

COVERAGE B – PERSONAL PROPERTY

We insure for accidental direct physical loss to property described in
Coverage B caused by the following perils, except as provided in
SECTION I – LOSSES NOT INSURED:

* * *

2. Windstorm or hail. This peril does not include loss to property
contained in a building caused by rain, snow, sleet, sand or dust.
This limitation does not apply when the direct force of wind or hail
damages the building causing an opening in a roof or wall and the
rain, snow, sleet, sand or dust enters through this opening.

** *

SECTION I - LOSSES NOT INSURED

 1. We do not insure for any loss to the property described in
Coverage A which consists of, or is directly and immediately

caused by, one or more of the perils listed in items a. through n.
below, regardless of whether the loss 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:

a. Collapse, except as specifically provided in SECTION I
ADDITIONAL COVERAGES, Collapse.(emphasis added)

* * *

2. 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
events. We do not insure for such loss regardless of: (a) the cause
of the excluded event; or (b) other causes of the excluded event; 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:

* * *

c.Water Damage, meaning:

Flood, surface water, waves, tidal water, tsunami, seiche, overflow of a body of water, or spray from any of these, all whether driven by wind or not;

* * *

3. We do not insured under any coverage for any loss consisting of one or more of the items listed below. Further, we do not insure for loss described in paragraphs 1. and 2. immediately above regardless of whether one or more of the following: (a) directly or indirectly cause, contribute to or aggravate the loss; or (b) occur before, at the same time, or after the loss or any other cause of the loss:

* * *

c. Weather Conditions

However, we do insure for any resulting loss from items a., b., and c. unless the resulting loss is itself a Loss Not Insured by this Section.

* * *

Although a loss caused by “collapse” is listed under subsection (1) of “Losses not
Insured,” that portion of the policy tells the insured that coverage will be afforded if the
contingencies of the policy’s additional coverage for “collapse” are triggered. That
additional coverage is triggered if the “collapse” involves the sudden entire collapse of a
building or a part of a building. The policy’s “collapse” coverage must also be caused by
certain enumerated actions. In the case of a policyholder that has been “slabbed,” it is undisputed that their property was reduced to a slab, or that the insured dwelling sustained a “collapse,” as that term is defined in the policy. It is also undisputed that the “collapse” of such an insured home was caused by one of the required events listed in the policy, a peril described in Section 1 – “Losses Insured, Coverage B – Personal Property.” According to the policy, State Farm’s “collapse” coverage is triggered by a “windstorm.” In this case, the loss was caused by a “windstorm” event, Hurricane Katrina. State Farm’s insured is, therefore, entitled to rely upon the policy’s additional coverage for “collapse” as an alternative theory to obtain benefits.

It is important to note that the “water damage” exclusionary language is found under Subsection (2) of the policy’s “Losses not Insured.” The introductory language of Subsection (2) contains State Farm’s notorious, “anticoncurrent causation” clause. The policy’s “collapse” provision is grounded under Subsection (1)’s “Losses not Insured” language, and the authority to add the coverage back in is found there.

As Subsection (1) contains different lead-in language, with a much different level of exclusionary authority, it does not make sense for the policy’s Subsection (2) lead-in language to apply to a “collapse.” Essentially, the provisions conflict, creating an ambiguity with respect to the additional “collapse” coverage. Courts routinely hold that conflicting language must be interpreted in the policyholder’s favor. Accordingly, the lead-in language of Subsection (2) and its resulting “water exclusion” cannot be used to defeat coverage in any way.

Importantly, the policy must be read as a whole, and all policy provisions must be harmonized. The additional coverage for “collapse” allows coverage for a “windstorm,” not just for “wind.” Yet, if State Farm (or any other insurer) is allowed to apply the anti-concurrent causation language and/or its “water damage” exclusion to the additional “collapse” coverage, the coverage for “windstorm” would be illusory and meaningless. See York Ins. Co. v. Williams Seafood of Albany, Inc., 544 S.E.2d 156 (Ga. 2001) (explaining, under Georgia law, that an insurer cannot rely upon an exclusion contained in a separate section of the policy as a way to defeat coverage for an additional coverage provision, when the applicability of the exclusion would render the additional coverage meaningless).

Further, if the “water damage” exclusion and the “anti-concurrent causation” clause were to apply under the circumstances of a “slabbed” structure, there would be no need to have the additional coverage for “collapse” caused by “windstorm.” The provision would be meaningless and illusory.

A “windstorm” typically implicates and involves some type of water damage when the windstorm is a hurricane. Similarly, in this instance, the coverage obligation for “windstorm” creates, at best from State Farm’s view, an ambiguity when looking at the exclusionary language at hand. State Farm chose its words carefully, recognizing that a “windstorm” is different than loss caused from “abnormally fast wind.”

If State Farm and other insurers wanted to exclude “collapse” from the flood waters of a hurricane and keep the “collapse” language from “excepting” out the “anti-concurrent” loss language, it should have written the policy in that manner. I think nobody thought about how the “collapse” peril as an exception to the exclusions would apply to a hurricane with storm surge. I predict the ISO and other carriers writing their own standard forms will change the language in the future just to prevent policyholder attorneys from noting this claim to coverage.

I am certain our draft brief can be improved upon. For others who make this argument, please send us whatever you write.

The rule and argument suggested in the title has applied at least in the following cases:

1. Zaitchick v. Am. Motorists Ins. Co., 554 F.Supp. 209, 215-16 (DCNY 1982), aff'd., 742 F.2d 1441 (2d Cir. 1983), cert., den., 464 U.S. 851 (1983) (insureds were entitled to recover replacement cost of home destroyed by fire where insurer refused to pay any money to insureds, which made it impossible for them to comply with condition precedent requiring them to first rebuild their home).
2. Ward v. Merricmack Mut. Fire Ins. Co., 753 A.2d 1214, 1218 (N.J.Super. 2000) (evidence created jury question whether property insurer's refusal to tender actual cash value made it impossible for insured to satisfy the precondition of replacing structure in order to recover the replacement cost and whether the condition was excused);
3. McCahill v. Commercial Union Ins. Co., 446 N.W.2d 579, 584 (Mich. Ct. App. 1989) (insurer's failure to advance funds that insured required in order to rebuild home excused insured from having to rebuild in order to recover for replacement costs of home);
4. Northrop v. Allstate Ins. Co., 720 A.2d 879, 883 (Conn. 1998) (insurer's withholding recoverable depreciation determined to be wrongful because it rendered replacement cost coverage illusory);
5. Bailey v. Farmers Union Co-op of Neb., 498 N.W. 2d 598-599 (Neb. Ct. App. 1992) (insured homeowner who lost home to fire entitled to recover replacement cost where insurer failed to ensure that it would reimburse her up to the policy limits);
6. Polack v. Fire Ins. Exch., 423 N.W. 2d 234, 235-38 (Mich. 1988) ("no reason to hold an insurer any less accountable for its actions than other contracting parties" replacement cost was proper measure of damages in case where insurer's refusal to pay prevented insured from rebuilding within 180 day deadline set forth in policy);
7. State Farm Fire & Cas. Ins, Co. v. Miceli, 518 N.E. 2d 357, 362 (III. Ct. App. 1987) (where insurer's denial of vandalism claim precluded insured from making repairs, insured entitled to recover replacement costs at trial);
8. Maine Mut. Fire Ins. Co. v. Watson, 532 A.2d 686, 688-89 (Me. 1987) (insured entitled to recover replacement cost).

Virtually all insurance adjusters are taught to pay the actual cash value of a building or personal property as soon as possible, and then pay replacement values on an ongoing basis for real and personal property as the replacement expense is “incurred.” Some policies now require the replacement to be “paid” or “completed” rather than just “incurred.” But, this is the common practice and most companies have written claims procedures that more specifically follow exactly what I have highlighted. Most insurers, acting in good faith, extend any limitations of the period of replacement, so long as the insurance company is not prejudiced by delay. The typical prejudice caused by delay usually results in price increases, and many insurers will still pay far outside the allowable period of replacement if the price is brought back to present value at the time of the loss rather than an inflated amount. Some just pay, acknowledging that they profited from the float. Some of my colleagues and others upset with the insurance industry may hate that I acknowledge that insurance adjusters and their managers do anything correctly, but most property insurance cases are amicably resolved in this manner.

The problem arises when some carriers make the wrong call on coverage, fail to timely pay, or fail to pay enough to allow the policyholder to replace. When this happens, the aforementioned cases and thorough discovery into the insurer’s typical practices provide the policyholder with a good factual and legal basis for jurists to relieve the policyholder from a harsh result caused by the insurance company’s wrongful decisions or actions.

Before getting to the holding, I thought there were two discussions in the opinion concerning this coverage, often called “Code Upgrade Coverage,” worth noting. First, the Court interpreted the policy as a common policyholder would, reading and contemplating what the policy meant in the circumstances of the loss. Second, the Court highlighted a practical admission by the insurance adjuster-- this type of coverage is confusing and repeatedly subject to disputes. Citing to another opinion, the Court noted:

“Generally, we read insurance policies as the average lay purchaser of insurance would. Here, Commonwealth has complicated the matter by incorporating a law-the building code-into its definition of coverage. Thus, Commonwealth's coverage extends to repairs to undamaged parts of a covered building if the repairs result from enforcement of any law or ordinance. If we read the policy as Commonwealth urges, the average purchaser of insurance would probably not understand its coverage without consulting an attorney to analyze the applicable building code sections. And this would largely frustrate the law's intent to encourage insurance companies to plainly write their coverage so laypersons can understand it….

... [T]he test is not what the building official reasonably believes the code allows him to do. Nor is it what a lawyer or judge believes the code allows. Rather, the test is what a reasonable lay insurance purchaser would believe the code allows the city to enforce.”

The court reasoned that “[a] reasonable lay purchaser of insurance would conclude that the building official has authority under [the unsafe structures section of the building code] to require alterations to existing, nonconforming uses that are dangerous to human life.”

The last footnote in the opinion also showed how important depositions can be to coverage opinions:

“Notably, in his deposition, GNY's senior claims examiner Robert H. Penn admitted that the policy language was unclear: “There are gray areas in this coverage and ... it is the subject of much discussion and debate even today. This coverage has been around a long time and the wording has changed over the years, but it is a coverage that almost always there are disputes every year with every company that writes commercial insurance.”

The summary of facts reveals that the insured alleged that policy required coverage for loss when it was required to bring non-damaged floors of its building into compliance with building code after a windstorm caused damage to one floor. The trial entered summary judgment in favor of insured, and insurer appealed.

The policy language in dispute was:

“3. Coverage C-Increased Cost of Construction Coverage

a. If a Covered Cause of Loss occurs to the covered Building property, we will pay for the increased cost to:

(1) Repair or reconstruct damaged portions of that Building property; and/or

(2) Reconstruct or remodel undamaged portions of that Building property whether or not demolition is required;

when the increased cost is a consequence of enforcement of building, zoning or land use ordinance or law.”

It should also be noted that Paragraph F of the Ordinance or Law Coverage section excluded “loss due to any ordinance or law that [the insured was] required to comply with before the loss, even if the building was undamaged” but the insured “failed to comply with.” However, that language did not apply because, at the time of the original construction, the building was in compliance with the Code and the insured was not required to rebuild to the new Code before the loss because it had been “grandfathered in.”

Now why this case is so important to policyholders is because the areas that the building officials required to be repaired to new Code were not connected to the damaged portions being repaired—these new Code repairs only came about because of the windstorm damage in other areas of the building. The Court specifically noted the contentions of the parties:

“In other words, defendant contends that there is an insufficiently direct connection between the wind damage to the seventh floor and the code official's direction that plaintiff make repairs to the other floors of the structure. Defendant analogizes the situation to one in which building inspectors arrive to inspect covered damage and fortuitously “happen” to notice other unrelated code violations or unsafe conditions, which they require the owner to fix. We disagree with all of these contentions.

Both parties agree that when a damaged building must be repaired or reconstructed, it is not unusual for building code officials to require that the work be performed consistent with current construction code standards, which may not have existed when the structure was built. Thus, there is no dispute that the clause in question applies to the increased costs of bringing the damaged portions up to current code standards…

The parties also agree that the clause would apply to undamaged portions of the same structure which must be brought up to code in the course of repairing the damaged portion. For example, if a portion of a wall collapses, and as result, code officials require the entire wall to be reconstructed using code-compliant materials, there is coverage.

The parties, however, disagree on whether the clause applies where the damage to one portion of a building causes code officials to require repairs to separate, undamaged portions of the building. GNY contends there is never coverage in this situation. Plaintiff contends that there is always coverage so long as “a covered cause of loss occurs” and the insured incurs “increased cost of construction ‘as a consequence of’ building code enforcement as a result of the covered loss….”

In this case, counsel for DEBS argued that a Tennessee case, Davidson Hotel Co. v. St. Paul Fire & Marine Insurance Co., 136 F.Supp.2d 901 (W.D.Tenn.2001), controlled. In Davidson, a water leak in a hotel led to a thorough inspection by city building inspectors, who “required compliance with numerous building code provisions” discovered during the inspection. The insured sought coverage for the cost of compliance with the building codes. The court found coverage:

“The language of [the quoted insurance] provision is clear. The provision applies to the “enforcement of any law or ordinance in effect at the time of covered loss.” The breadth of the provision is not diminished by any limiting language regarding the “grandfathered” status of code violations, as St. Paul would have the Court hold. The main limitation upon this provision is the causal connection required between the loss and the enforcement. Davidson has shown this causation through deposition testimony of several building officials involved in the inspection process. The testimony makes clear that, in the first place, the inspection occurred only because of the incident giving rise to liability and, secondly, the thoroughness of the inspection was also a result of the incident. The Court finds that the proximate cause of the inspection was the February 16, 1998, event, and therefore, that the plain language of this provision renders St. Paul liable for costs associated with code compliance.”

The Court specifically noted that this case was different than Davidson and it did not have to stretch the causation that far to find coverage under the policy:

“…there is a clear causal connection between the collapse of the seventh floor wall and the code official's mandate that plaintiff bring the remaining floors into compliance to prevent them from collapsing. Our courts have adopted the proximate cause test for determining coverage:

Where a peril specifically insured against sets other causes in motion which, in an unbroken sequence and connection between the act and final loss, produced the result for which recovery is sought, the insured peril is regarded as the proximate cause of the entire loss. It is not necessarily the last act in a chain of events which is, therefore, regarded as the proximate cause, but the efficient or predominant cause which sets into motion the chain of events producing the loss. An incidental peril outside the policy, contributing to the risk insured against, will not defeat recovery.... In other words, it has been held that recovery may be allowed where the insured risk was the last step in the chain of causation set in motion by an uninsured peril, or where the insured risk itself set into operation a chain of causation in which the last step may have been an excepted risk.

We need not decide here the precise outer reaches of coverage under the clause at issue. Unlike Davidson, supra, this was not a case in which the local inspector happened to be in the building because of the wall collapse and fortuitously discovered one or more unrelated code problems. There was a direct connection between the covered damage and the additional work required to the building.

…the prior nonconforming condition was considered legally acceptable before the disaster occurred. …Further, the required upgrades concerned the same structural part of the building…, the same building code provision, and the same type of repair (installation of angle irons).

The language of the policy itself also supports our conclusion that there is coverage here. In this case, the policy explicitly excluded pre-existing code violations which the insured had failed to correct. However, the policy did not specifically exclude situations where, as here, a covered structure was grandfathered under the current code but lost its grandfathered status because of the occurrence of covered damage…. the case is analogous to the situation in Regents, where repairing the fire damage triggered ADA-related expenses in remodeling undamaged portions of the building. If the insurer intended to exclude coverage in such situations, it could have specifically so provided. See Feinbloom v. Camden Fire Ins. Ass'n, 54 N.J.Super. 541, 544-45, 149 A.2d 616 (App.Div.), certif. denied, 30 N.J. 154, 152 A.2d 172 (1959) (finding coverage for the entire loss where, by operation of local zoning law, the insured was required to raze rather than repair a nonconforming structure that suffered extensive fire damage); Danzeisen v. Selective Ins. Co. of Am., 298 N.J.Super. 383, 388-89, 689 A.2d 798 (App.Div.1997) (insurer failed to craft clear policy language to avoid the Feinbloom rule).”

There is just one final point which is important to me. The 1959 Feinbloom decision was the result of a very creative public adjuster, Ira Sarasohn. After I left Paul Butler and the world of representing insurance companies for helping policyholders in February 1985, Ira Sarasohn was one of two public adjusters (the other being Dick Tutwiler to immediately suggest that their clients consider me as a possible legal counsel. I was only twenty-six at the time they made those recommendations. Sadly, Ira has passed, but we often talked about the Feinbloom case and how insurance policies, if interpreted from the standpoint of the policyholder, can help soften the financial blow caused by the impact of a loss. More insurers should adopt Ira Sarasohn’s view and write their products in a way that would truly help their customers after a loss.

Chris Boggs has a number of columns at MyNewMarkets.com that every insurance agent should read. Anybody reading some of Boggs’ very technical explanations of coverage can better appreciate how much education and dedication is required of insurance agents and brokers. Anybody very good in insurance at the claims or solicitation level knows you have to be a little bit of a nitpicker or nerd to enjoy the nuances of language within the various insurance policies. A little research about Boggs shows he is as well:

“Boggs brings nearly 18 years of experience in insurance and risk management, a background that includes teaching pre-licensing and insurance continuing education courses and writing on coverage and insurance-related issues.

He is a veteran insurance professional, having worked as an account executive for several property/casualty agencies and as a senior risk analyst for one of the largest risk consulting firms in the Southeast.

He is a former associate director of education for the Independent Insurance Agents of North Carolina, Inc. and a former loss control and claims specialist for the North Carolina Department of Insurance.

International Risk Management Institute's (IRMI's) The Risk Report, The John Liner Review, RIMS' Risk Management magazine, and the American Public Power Association magazine have featured several of his articles.

In addition to teaching others and writing about insurance and risk management, Boggs has himself earned a host of insurance designations, including CPCU, ARM, ALCM, LPCS, AAI and APA.
…
Boggs is thrilled with his new assignment. "I'm a little odd in that I absolutely love the technical issues in insurance and risk management. I enjoy delving into the details of policies, finding coverage gaps, comparing terms and conditions," says Boggs. "I'm truly excited about being able to do this while helping fellow agents and brokers solve their problems."

Few individuals have the depth of insurance education reflected in Boggs’ certifications. It is obvious he is well and wide versed in various aspects of insurance and should be thought of as a leading educator in the insurance field. His leadership of thought is demonstrated in his bold pronouncements of what agents and brokers should be doing during the solicitation and underwriting of policies. In a field with an extremely important ethical and knowledge based duties, it is important to have somebody discussing the issues agents and brokers confront, and doing so with clearly spelled out guidelines which should be followed to benefit and properly protect the policyholder.

His current article, Three Commercial Property Endorsements Every Client Should Have, notes that not all property is covered under standard forms but that endorsements are available to help partially correct this policy gap of coverage:

“This post is the first of a three-part series expounding on the theme of using coverage gaps to sell; but rather than specific coverage gaps, these three posts focus on endorsements to the commercial property, commercial auto and commercial general liability policies every insured should consider or avoid (in the case of the CGL article).

Three key commercial property endorsements are discussed in this first installment, the: 1) Additional Covered Property endorsement (CP 14 10 or state-specific form); 2) Additional Building Property endorsement (CP 14 15); and 3) Joint or Disputed Loss Agreement (CP 12 70). Obviously these are not the only commercial property endorsements valuable to a specific insured, but these are three every insured should consider.”

Notice how Boggs clearly indicates what agents should do. He notes that an agent or broker should make the coverage gap known to the policyholder. He then explains in the article what endorsements the policyholder should consider purchasing and why:

“The commercial property policy contains a list of "property not covered" within the form itself. Among the list of excluded property exists several property types or real and personal property the insured (and possibly even the agent) may assume is covered by the policy but is not. Examples include building foundations, underground pipes, flues or drains and fencing (this is not a complete list of excluded property, just a sample).

Some excluded property can be added back to the list of "covered property" via the Additional Covered Property endorsement. Two broad versions of the form are available from ISO - based on the state in question:

1. The CP 14 10. This is essentially a blank form allowing the insured to specifically list the property they wish to remove from the "property not covered" list and include as covered property; and
2. ISO State-specific endorsements. Two examples are N.C. (CP 14 11) and Va. (CP 14 12). In forms such as these, several types of real and personal property are taken from the list of "property not covered" within the unendorsed coverage form and listed on the endorsement. The insured chooses which property it desires to include as "covered property" and indicates that choice by placing an "X" in the box next to that property class.

Any removal of property from the "property not covered" list and its endorsed inclusion on the "covered property" list is, of course, subject to underwriter approval - regardless of which version of the form is used.”

Everybody can learn from people who have a specialized knowledge in a field. Chris Boggs can teach all of us a lot about property insurance coverage from the perspective of agents and brokers selling these products.

The Segals' Boca Raton home was damaged by Hurricane Wilma in October 2005. The Segals duly filed a claim under their homeowner's insurance policy with Harford. Hartford accepted liability for the claim. However, Hartford held back the depreciation in value of the damaged property that was covered. The Segals felt Hartford's depreciation holdback breached the insurance policy, and sued. Hartford moved to dismiss the Segals' Complaint with prejudice for failure to state a claim.

The United States District Court for the Southern District of Florida granted Hartford's motion to dismiss because the Segals' insurance policy with Hartford included a depreciation holdback clause. Thus, the district court concluded that Hartford's depreciation holdback pursuant to that clause was not a breach. The Segals appealed.

The 11th Circuit affirmed the district court's dismissal and held that the Segals' Complaint failed to state a claim. On appeal, the Segals had two arguments. First, the Segals argued that Florida Statute § 627.7011(3), which prohibited insurers from holding back the depreciation in value of damaged property covered by a policy, was incorporated into the Segals' policy. Unfortunately for the Segals, the statute went into effect after the Segals' policy was signed. The parties even agreed the statute did not apply retroactively to the Segals' existing policy. However, the Segals argued that the statute prohibiting depreciation holdback was incorporated into their policy through the policy's liberalization clause. The liberalization clause stated,

"If we make a change which broadens coverage under this edition of our policy without any additional premium charge, that change will automatically apply to your insurance as of the date we implement the change in your state . . . "

The court, however, disagreed with the Segals, and explained that in Florida, contracts for insurance "are construed in accordance with the plain language of the policies as bargained for by the parties." Segal, 2009 U.S. Dist. LEXIS 13215 at *1. So, the court analyzed the liberalization clause pursuant to its plain language. The liberalization clause stated, "[I]f we make a change . . . ." Id. Section 627.7011(3)'s change prohibiting depreciation holdback, however, was made by the Florida Legislature, not by Hartford. Thus, the court took a narrow view of the liberalization clause and held that pursuant to the policy's plain language the liberalization clause did not incorporate the statute's provision prohibiting depreciation holdback.

Second, the Segals argued that the same liberalization clause also incorporated Hartford's changed practices to no longer holdback depreciation to their insureds. The court, however, rejected this claim because the Segals did not allege Hartford's changed practices in their Complaint. Accordingly, the court affirmed the district court's dismissal of the Segals' Complaint with prejudice for failure to state a claim.

Click here to read the full opinion. Please understand that I am not in agreement with this decision as it applies to most policies that also indicate that they will conform to the state law. Read together, a change in state law should be iberalized because the form policies issued would have to provide coverage. In this case, it may be that no liberalizatin took place until after the loss happened.

There are some lessons to remember from this case.  Always ask for the most recent forms and endorsements being issued which reflect the statutory changes. Always ask for a certified copy of the policy with endorsements. Check the Department of Insurance for requests by the carrier for approved endorsements which may prove the liberalization of coverage.  

The United States District Court for the Northern District of Florida, granted Providence Property & Casualty Insurance Company's Motion to Transfer Venue from the Northern District of Florida to the Western District of Oklahoma pursuant to 28 U.S.C. § 1404(a) based on the policy's forum selection clause in a diversity jurisdiction case. 28 U.S.C. § 1404(a) provides, in pertinent part,

"(a) For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought."

28 U.S.C. § 1404(a) (2009).

In other words, Section 1404(a) allows a party to transfer the venue of a lawsuit to any venue where jurisdiction was proper. Here, the court explained that not only does Section 1404(a) allow the transfer, but a forum selection clause can mandate the transfer so long as the transfer was not "unreasonable or unjust and the clause was not the product of fraud or overreaching." Pyramid Diversified Servs., Inc. v. Providence Prop. & Cas. Ins. Co., 2009 U.S. Dist. LEXIS 49056 (N.D. Fla. June 10, 2009). Basically, forum selection clauses are the "get out of jail free" cards for venue selection and transfer.

The Pyramid court explained that forum selection clauses were enforceable by federal courts, and federal law, rather than state law, governed the determination of whether to enforce a forum selection clause in a diversity jurisdiction case. The court further explained that forum selection clauses are:

"generally considered either mandatory, in which there is a clear, unequivocal expression of the parties' intent to exclusively limit the forum to a particular venue of court, or permissive, in which there is no clear expression of exclusivity but rather an understanding that the parties have consented to venue or jurisdiction in a particular forum."

Pyramid Diversified Servs., Inc., 2009 U.S. Dist. LEXIS 49056 at *1.

After reviewing the forum selection clause at issue in Pyramid, the court concluded that the clause was mandatory rather than permissive. The clause read:

"The parties agree that any legal action, suit or proceeding relating to this Agreement or the transactions contemplated hereby, shall be instituted in a federal or state court sitting in Oklahoma County, Oklahoma, which shall be the exclusive jurisdiction and venue of said legal proceedings."

Pyramid Diversified Servs., Inc., 2009 U.S. Dist. LEXIS 49056 at *1.

The court concluded the clause to unambiguously demand that litigation would take place in Oklahoma County, Oklahoma. The court further noted that the action might have been brought in the Western District of Oklahoma and jurisdiction was proper. Accordingly, the court granted Providence's Motion for venue transfer from the Northern District of Florida to the Western District of Oklahoma.

So, the lesson here is to read those pesky forum selection clauses. If not, you could find yourself litigating in Western Oklahoma and possibly dealing with an unfamiliar body of law. So, just remember, forum selection clauses are kind of a big deal.

To read the full opinion, click here.

Guideone sought declaratory judgment in the U.S. District Court for the Northern District of Mississippi that it was entitled to rescind the homeowner's insurance policy and had no duty to indemnify the Rocks' insurance claims. The Rocks filed a counterclaim alleging bad faith throughout the claim investigations and subsequent claim denials. Guideone then filed a Motion for Summary Judgment that the Rocks' homeowner's policy was void due to alleged material misrepresentations on the insurance application, that the loss for home and auto was excluded due to material misrepresentations and concealment throughout the claim investigations, that the Rocks failed to perform contractual duties during the claim process, and that its claim investigations and denials did not constitute bad faith. The U.S. District Court for the Northern District of Mississippi granted Guideone's Motion for Summary Judgment holding that Guideone's investigation and subsequent claim denials did not constitute bad faith, but denied Guideone's Motion for Summary Judgment on all material misrepresentation and failure to perform contractual duties issues.

Under Mississippi law misstatements of material fact in insurance applications provide grounds to declare a policy issued in reliance on such statements void. A misrepresentation is considered material if (1) the application contains answers which are false, incomplete, or misleading; and (2) the false, incomplete, or misleading answers are material to the risk contemplated by the policy. The court noted, however, that an insurer cannot rescind a policy for material misrepresentations if an insured acted in good faith, and any false answers were inserted without his or her knowledge. Thus, an applicant had not misrepresented if he or she answered all questions asked. According to the Rocks, Guideone's agent never asked them the application question whether or not a household member had any criminal convictions, and thus answered all application questions in good faith. The record, however, contained conflicting testimony on whether or not Guideone's agent asked the Rocks the criminal history question. Therefore, there was a genuine issue of material fact as to whether or not the Rocks misrepresented their criminal history, and Guideone's Motion for summary judgment was denied on that issue.

The court also denied Guideone's Motion for Summary Judgment on other grounds and held that there was a genuine issue of material fact as to the Rocks' alleged concealment during the claims process and intentional acts, and also held that the Rocks' did not fail to perform their contractual duties by failing to produce their children for examinations under oath.

Guideone claimed they could deny the Rocks coverage based on the Rocks' home and auto insurance policies' concealment and intentional acts exclusions. First, Guideone claimed that the Rocks' inconsistent statements regarding their financial condition amounted to concealment that excluded coverage. Under Mississippi law, in order to deny coverage based on concealment the insurer must establish that the insured knowingly and willfully made false statements that were material. In Mississippi, an insured's financial matters are material to a fire investigation. However, Guideone used unsworn recorded statements and depositions without providing transcripts as evidence. The court concluded that such evidence was not proper Summary Judgment evidence because it required the court to make impermissible credibility determinations. Second, Guideone claimed that the Rocks' loss was excluded because the damage was caused by arson. Not only did the Rocks' policy have an intentional acts exclusion provision, but, in Mississippi arson is a defense to insurer liability even if it is not excluded in the policy. To invoke this defense, the insurer must prove (1) an incendiary fire, (2) motive of the insured to destroy the property, and (3) evidence that the insured had the opportunity to set the fire or to procure its being set. The court declined to grant Guideone's Motion for Summary Judgment on this issue, however, because inconsistent testimony created a genuine issue of material fact.

Finally Guideone claimed that the Rocks' failure to produce their children for examinations under oath was a breach of the Rocks' home and auto insurance policy provisions that required the "insured" to submit to questions under oath. The court concluded, however, that the Rocks' children were not considered the "insured" under the homeowner's insurance contract. The Rocks' homeowner's insurance policy defined "insured" as "you" and "your" and a spouse in the same household. The court reasoned that this language did not include the Rocks' children. Likewise, the court concluded that the children did not have to submit for questioning under the auto insurance policy because the auto policy provided that a person seeking coverage must submit to questions, and the parents, not the children, were the persons seeking coverage. Thus, the court denied Guideone's Motion for Summary Judgment on this basis.

The court ultimately granted Guideone's Motion for Summary Judgment as to the Rocks' bad faith counterclaim and held that Guideone's investigation and subsequent denial of the Rocks' claims did not constitute bad faith. In Mississippi insurers have a duty to perform an adequate investigation and make a reasonable, good faith decision based on that investigation. The court noted, however, that to show bad faith an insured must show more than mere negligence by the insurer. Instead the insurer must have denied a claim (1) without an arguable or legitimate basis, either in fact or in law, and (2) with malice or gross negligence in disregard of an insured's rights. In Mississippi a policy exclusion or defense may constitute a good faith, arguable basis for denial. Accordingly, the court held that Guideone's denials were not done in bad faith because they were based on valid policy provisions, and:

"were not the sort of tortuous conduct" such as "a conscious wrongdoing, dishonest purpose, willful wrong, malice, or reckless disregard of an insured's rights necessary to support a bad faith claim."

You can read the full opinion here.

After yesterday's post, I received a number of private questions as well as a public comment from Eric Hyman, an experienced public adjuster. I replied to his comment:

Eric,

I really have no idea how they go about classifying what you have stated. I have no idea how much Citizens pays in attorney’s fees to defend its cases nor how much it pays policyholders for attorney’s fees when it loses. Do you have any evidence to support your allegations? Send it to me, and I would be more than happy to share it.

I appreciate that you are upset that the manner in which you resolve cases with Citizens may no longer be available. You have told me that most of your cases go to appraisal because Citizens never comes close to agreeing with amounts you provide. And, you get significantly more money back for the policyholder.

Indeed, I predict there will be considerable "push back" because a cottage industry of appraisers for each side and umpires may no longer be making fees from the number one source of appraisal--Citizens.

Still, the process is inherently flawed. There is no due process. I have said that since there are no rules, the only rule is to be honest, but do everything you can to win.

In Florida, when the appraisal result is unfair, there is little either party can do about it. Unfairness may occur in arbitration or litigation, but I can assure everyone that they will be able to present their case, subject the opposing view to critical review, and submit the matter to a somewhat independent panel or jury. All of this guaranteed by the due process clauses of the United States and Florida Constitutions.

The other truth is that Citizens management may feel that the appraisal process results in unjust awards favoring policyholders. If so, they should explain why and how the appraisal process favors policyholders over insurers.

My impression is that the cases going to appraisal now have a policyholder who knows to get evidence and make a presentation to show the validity of the claim amount. In the past, insurers would run over policyholders, thinking their appraiser would do all this work. The appraisal process is no longer a "winning" proposition for insurers as it was in the past, and now some insurers are seeking other ways to game the system to lower claims payments to customers.

Citizens makes several valid points in its report, although I disagree with its publicly stated motive for requesting eliminating the appraisal clause.

Given that public adjusters are obtaining more money for policyholders through appraisal and that so many others, such as appraisers and umpires, have made careers in the appraisal process, you can bet those individuals with such significant financial interests oppose Citizens’ move. This is a normal reaction to the possibility significant change.

My opinion of appraisal has not changed much over the past fifteen years since I chaired a sub-committee of the American Bar Association's Property Loss Insurance Committee involving a study of the fairness and procedures of the appraisal clause. The procedures vary by state. Many states have noted the due process concerns and have required the process to be more of an arbitration. Florida's procedure for appraisal is what I call the wild west method. There are no rules. Shoot 'em out, and you better be standing when the smoke clears because there are no second chances for the dead.

I essentially said this when I was asked to be on a Keynote Panel regarding the appraisal process at the Windstorm Conference. While various attorneys, umpires, appraisers, and insurers have tried to set rules through a "Memorandum of Appraisal," that is not required under the terms in insurance policies, statute, or common law.

As an attorney, I always point out that the United States has long held many informal methods unconstitutional. One of the great protections to individuals is a right to have a jury decide controversies. This is a fundamental right with a longstanding history. Alternative methods to resolve controversies must satisfy due process safeguards. I have questioned how a system with no rules does this. Some States, like Florida, allow the informality without addressing constitutional concerns.

Dan Luby, of Precision Adivisors, sent me a private follow-up. It is pertinent to this issue:

"I read your blog today concerning the changes to the Citizens Appraisal clause. I appreciate the attribution.

As a follow up, attached is an excerpt from a recent Citizens filing with the OIR that details the proposed changes to the Appraisal clause in the ‘Homeowners 4 Contents Wind Only Form.’

Appraisal will now be an option available to either party provided that both parties agree to the “terms of a written agreement” to be determined at a later date.

I read this to mean a negotiated ‘Memorandum of Appraisal’ detailing what would be submitted to appraisal, how the appraisal would be conducted and the form of the award. Either party is not obligated to accept a “request” for appraisal.

Scroll down to page 10 of 12 in the policy form. While this filing deals with only one policy form, I would speculate that all of the Citizens policies will be similarly amended.

The complete filing (No. 09-11984) is available at http://www.floir.com/edms/temp1/SessionsPDFs/OnlyOrig09-11984.PDF

Additionally, this new form would require that “any one you hire in connection with your claim” must submit to an EUO if requested. I assume this is targeted towards public adjusters."

This is an important issue and will likely significantly change the way many claims are handled and resolved. I will try to keep everyone informed of these changes.

Of course, that is not how Citizens’ in-house attorneys and management try to spin what they are doing by removing the appraisal clause from their property insurance policies. After all, if the Board of Governors really wanted to know why Citizens loses at appraisal, it would not make an in-house inquiry. The claims managers would just make excuses for losing. If the Board of Governors wanted to know the embarrassing truth, they would ask their opponents, “why are our claims handlers losing these appraisals?”

Citizens is a part of Florida’s government. So how embarrassing would it be for our elected representatives and our appointed Board of Governors if the media reported that Citizens lost so many appraisals because it severely underpays claims and battles its policyholders regarding how much is owed? What if the media reported that this is the true reason that Citizens wants to end appraisal?

Citizens usually loses badly in appraisal because its adjustments are not correct and reflect a bias to underpay policyholders. It delays claims and battles policyholders rather than engaging in a dialogue about resolution and why a dispute occurs.

For example, I have invited Citizens senior management to speak on a multi-million dollar claim that has been pending for several years with another attorney in our firm. They refused to even speak with us, cancelled settlement meetings, refused the less expensive alternative of appraisal, and forced us to file a lawsuit to force a resolution. All this, despite our client’s hope that the matter could be resolved amicably, without a lawsuit. When claims managers refuse to talk and discuss differences, lawsuits are the only option. Citizens customers must wait and then fight for money that is rightfully theirs.

Many of Citizens’ claims are handled so poorly that almost anybody reviewing a closed claim can find significant amounts that were not paid. I hear this all the time. It is the major reason Citizens has re-opened claims--it underpays the initial adjustment.

Still, appraisal is not a “right” for policyholders. Citizens management and in-house attorneys made an excellent point that appraisal has no written rules and is subject to abuse. I am surprised that the Florida Supreme Court has allowed appraisal, an informal process, to bind parties. I have long felt that an informal process of binding resolution violates due process. At one time, Florida Courts ruled that the appraisal process was subject to the Arbitration Code. This is no longer the case, and Citizens correctly pointed to the deficiencies of appraisal in its report to the Board of Governors.

Citizens did not report to its Board of Governors the true reason management wants to change the rules and take appraisal out of the policy. Somebody on the Board of Governors should question whether Citizens management is being truthful and the media should start an inquiry. Everybody in the business knows that the true reason for removing appraisal from the policy is because Citizens underpays many claims, and appraisals embarrassingly prove it.

Dan Luby of Precision Advisors forwarded me the following story of Citizens’ change to eliminate the appraisal clause:

It would appear that Citizens Property Insurance Corporation is changing their previous position on amending the Appraisal process and is now recommending the elimination of the Appraisal process.

 The following are the minutes from the Citizens ‘Actuarial and Underwriting Committee Meeting’ held on May 11, 2009:

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 DISPUTED CLAIMS/APPRAISAL – POLICY FORM CHANGES

MAY 11, 2009

 EXECUTIVE SUMMARY

 Staff seeks approval to amend Citizens’ policy forms (1) to eliminate appraisal as a mechanism to resolve disputed property claims, and (2) to improve certain claims adjusting processes. The elimination of appraisal is a change from the recommendation made last year to reform appraisal policy language. See minutes of Actuarial & Underwriting Committee, May 29, 2008; Board of Governors, June 19, 2008.

Background

Citizens’ property policies generally provide that, in the event of a dispute related to the “amount” of a loss, either Citizens or the policyholder may demand an appraisal of the loss. Citizens’ policies currently use industry standard language. The principal advantages of a disputed claims appraisal are that it generally resolves claims disputes more quickly and with less expense and fees than litigation. But its advantages are overshadowed by its disadvantages.

Notwithstanding significant and meaningful operational reforms that Citizens and its Litigation & Disputed Claims Unit (“LDCU”) have instituted, appraisal remains very flawed and subject to abuse by third-party stakeholders. The standard language used by Citizens and the industry is problematic because it provides virtually no rules for the process. As a result, insurers (including Citizens) are legally required to pay damages that may not be covered by the policy form, nor caused by a covered peril, nor supported by substantial evidence, and without recourse to meaningful judicial review. The process is so problematic that some carriers have eliminated appraisal from their policy forms (and some others are in the process of doing so).

In its January 2009 report on Citizens, the Auditor General recognized the flaws of the appraisal process and the challenges of third-party stakeholders, and further encouraged Citizens to complete its work on this issue, by stating: “Citizens’ staff is reconsidering whether to move forward with these amendments or, instead, whether it should eliminate appraisal from its policy forms (in which case these disputes would be resolved through litigation). . . We recommend that Citizens continue to evaluate its options . . . and select an option which ensures the fair treatment of policyholders and full disclosure of all decisions made relative to the claim amounts ultimately paid.”

Recommendations

Staff recommends the following changes to its various property policy forms, as applicable: 

• Eliminate the provision for appraisal of disputed property claims. 

• Provide Citizens with the option to require examination under oath and recorded statements for all property claims. When the insured is an association or corporation, require that certain representatives must submit to examination under oath and recorded statements.

• In multi-peril policies, conform the “duties after a loss” provisions to those in wind-only policies; and modify the “duties after a loss” provisions of all policies to improve the claims adjusting process.

 Staff recommends elimination of the appraisal provision principally for the following reasons: 

• Citizens has more confidence in the judicial system than in the appraisal process. Litigation has known rules and procedures. Whereas appraisers and umpires are essentially unregulated, opposing attorneys and judges are subject to the Florida Code of Professional Responsibility (essentially, an enforceable code of ethics and rules of compliance), as well as supervision by The Florida Bar Association and the Florida courts (including discipline by the Florida Supreme Court).

• Alternative dispute resolution (ADR) is important from consumer perspective, but stakeholders are skipping statutory mediation and filing appraisals as the ADR of choice. By eliminating appraisal, statutory mediation favored by the Florida Legislature will again be the ADR of choice. Should Appraisal be eliminated, there will remain multiple opportunities for mediation and early settlement. Citizens may institute other ADR if the insured agrees.

• For policyholders, appraisal is a secretive process, with the basis of the award outside the scrutiny of the policyholder and the insurer. Like Citizens, policyholders have virtually no way to seek judicial review of an appraisal award. In litigation, a policyholder is able to recover its attorney fees, while its appraisal expenses generally come out of the award. 

• Elimination of appraisal meets the objectives suggested by the Auditor General’s office (fair treatment of policyholders and full disclosure of all decisions) because the courts are very attentive to policyholder rights, and because judicial decisions and jury verdicts are fully disclosed.

RECOMMENDATION

Citizens’ staff requests that this Committee recommend to the Board of Governors that Citizens amend its policy forms and submit appropriate filings to the Office of Insurance Regulation to: (1) eliminate disputed claims appraisal, and (2) improve claims adjusting as described in this Executive Summary.

So, it should come as no surprise to find an old insurance coverage case, Heron v. Phoenix Mut. Fire Ins. Co., 180 Pa. 257 (Pa. 1897) where a fire insurance policy sold to Fred Heron in the late 19th Century had the following exclusionary language:

"This entire policy...shall be void. . . if the hazard be increased by any means within the control or knowledge of the insured, . . . or if (any usage or custom of trade or manufacture to the contrary notwithstanding) there be kept, used or allowed on the above described premises, benzine, benzole, dynamite, ether, fireworks, gasoline, greek fire, gunpowder exceeding twenty-five pounds in quantity, naphtha, nitroglycerine, or other explosives, phosphorus, or petroleum or any of its products of greater inflammability than kerosene oil of the United States standard (which last may be used for lights and kept for sale according to law, but in quantities not exceeding five barrels, provided it be drawn and lamps filled by daylight or at a distance not less than ten feet from artificial light)."

I would wager that poor old Fred was just like the rest of us today. My bet would be he never read that insurance policy or thought about how those rascally insurance scriveners would find ways not to pay for a fire loss if one occurred. I suspect Fred Heron was more concerned about his Fourth of July celebration. The devastating facts were recited by the Court:

"For the purpose of celebrating the 4th of July of that year, plaintiff bought a lot of assorted fireworks which were delivered at his residence on the morning of the 3d, and were shortly afterwards, with his knowledge and approbation, placed in the parlor for use on the following evening. In some unexplained way they took fire on the afternoon of the same day, and caused the damages for which this suit was brought."

It is clear that over a hundred years ago the judges would consider not enforcing unfair language in insurance contracts if they could find a logical way to do so. Avoiding forfeiture of a valid contract after purchase has been a major theme of our jurisprudence. Insurers have every incentive to sell insurance with agents promising security and then write fine print substantially reducing the benefits the consumer thought he or she purchased.

I strongly suggest reading Barry Zalma's "Fraud By Insurers" published on the Lexis Insurance Law Center. Zalma, an insurance defense lawyer, apparently agrees with me on this point when he wrote:

"Ostensibly legitimate insurers are attempting to limit their exposure by giving a policy a common name like “homeowners” that leads the insured to believe that liability coverage is provided for defense and indemnity of an accident, including continuous or repeated exposure to substantially the same general harmful conditions that occur within the policy period, as provided by the standard ISO homeowners policy. Then, with an endorsement hidden in the back of the policy in small print without any warning, the endorsement changes the definition of “occurrence” to words that eliminate most coverage unless it happens within and is reported to the insurer during policy period. It is, in effect, selling the insured a bowl of sweet and healthy blueberries and delivering, in a sealed package, toxic mushrooms.

In an editorial in the June 15, 2009, issue of Zalma’s Insurance Fraud Letter...Barry Zalma writes: “insurance sellers, buyers, counsel, and claims staff must refuse to attempt to enforce such policy provisions unless the following questions are answered in the affirmative:

• Is the new wording conspicuous and clear?

• Was it called to the attention of the prospective insured?

• Was the insured asked to acknowledge in writing that the coverage provided is less than that provided by the standard ISO CGL form?

• Was the insurance agent or broker warned, in writing, of the modification of the form and the fact that it provides less coverage than an ISO CGL?

• Was the insured and the agent or broker asked to acknowledge and have the insured acknowledge in writing that they understand and accept the modification?

• Was the premium significantly reduced in light of the reduction in coverage?"

Mr. Zalma warns that “The insurer that acts to deceive, unlike the insured who acts to deceive, can be held to pay extracontractual damages for the tort of bad faith while the insurer can only collect contract damages from a deceptive insured.” Sandy Burnette and members of the Defense Research Institute must be upset that an insurance colleague recognizes that insurers commit fraud everyday when denying claims based on devious small print exclusions and that they should be held accountable for extracontractual damages when doing so.

Turning back to the legal discussion in the old insurance case, we find that the concerns of judges long ago are not that different than of today:

"We have never gone to the length that other courts have in construing away express provisions or stipulations as to forfeiture. While some hold that it is permissible to use the articles prohibited by the general printed clause, provided they are such as naturally pertain to the stock of goods or property described in the written part of the policy, this court has refused to go so far. In Birmingham Fire Ins. Co. v. Kroegher, 83 Pa. 66, where petroleum was kept for sale in a country store in violation of a printed clause very similar to that above quoted, this court said: "If the question were whether this kind of oil was an article of merchandise ordinarily included in the stock of a country store, or if it were only an inquiry as to the increase of risk, it might well be referred to the jury. But it is nothing of the kind: it is an express stipulation that petroleum or its products shall not be kept on the premises, and if it be so kept the policy is void. It matters not that it was part of a customary stock of goods, for by express contract it was excluded." ...In Birmingham Fire Ins. Co. v. Kroegher...a qualification was suggested ...which the learned trial judge in this case sought to carry to a length not warranted by any of our cases. It was there said by Mr. Justice GORDON: "It is probable that this provision would not apply to the oil used in lighting the premises, for such a use has, in these days, become a necessity for all buildings in the country in which light is required during the night." ...our Brother DEAN, speaking for the court, said: "If the fact were that the use were a necessary one in conducting the business, then it must be presumed the intent of the parties was to insure the subject of the contract as it then was, and as it would continue to be during the life of the policy, notwithstanding the printed condition."

Unfortunately for the Fourth of July reveler, Fred Heron, this court was not sympathetically inclined:

"...These cases rest on the necessary and contemplated use of the property, and cannot be supported on any other ground. They furnish no warrant for the advanced position taken by the plaintiff in this case. There is no ground for a presumption that the parties here contemplated even the temporary presence of fireworks in the insured building in the face of an express contract to the contrary."

So, how many of you waiting to celebrate tonight with fireworks know for certain whether there is an "increase of hazard" provision in your insurance policy that may exclude a fire loss?

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.