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

Examinations under oath are often not needed if the insurance company has only non-fraudulent concerns. Discussion and exchange of information is far quicker and much more in depth than the typical questions and answers in most examinations under oath. Insurance adjusters, claims managers and their attorneys must know must know this, so the only real reason for examinations under oath is to help the insurance company attorneys make final coverage suggestions before their claims managers make the decision.

Corey Harris wrote an excellent piece in When Can An Insurer Require An Examination Under Oath? Readers should note that this post involves Florida law and many states have different case law, regulations and statutes that may apply. Most regulations and statutes require insurers to quickly invoke examination requests or lose the right. United Policyholders remarked in Examinations Under Oath on the various consumer protections regulations and statutes that are needed to keep insurers acting in good faith:

Companies use this procedure to screen out fraudulent claims and test a policyholder’s credibility and/or evaluate what kind of a witness he or she will make if a claim or coverage dispute goes into litigation. The EUO procedure was abused by insurers after past disasters to intimidate and frighten policyholders. So United Policyholders helped pass legislation in California to stop the abuses and protect policyholders. (empahsis added) But the EUO procedure is still a legal and valid requirement in homeowners policies, and the law in most states is vague on the subject. A homeowner who makes a claim for policy benefits must cooperate when an insurer makes a reasonable request to examine them under oath or risk losing the right to recover the funds they’re entitled to. Courts have traditionally been hard on policyholders who refused to cooperate in EUOs.

In California and in most states there are “Fair Claim Handling Regulations”, and there are laws that tell insurers what they must, can and cannot do. Above all, your insurance company has the legal duty to investigate and process your claim fully, promptly and in good faith and deal with you fairly.

Florida and other states in the Southeast need more consumer protections to prevent and discourage the delays that routinely occur when some insurers’ investigations seem to last forever and do not lead to a claims decision, but further excuses for more delay--- usually the excuses of needing and analyzing more information. Some insurers are trying to avoid this by re-writing policies with increasing and detailed conditions precedent.

Nevertheless, Corey Harris correctly notes the general majority rule: Examinations Under Oath should be demanded timely, before payment or denial, and definitely before a properly filed lawsuit where the insurer had not reqested an examination. His discussion gets to the heart of the matter:

...the Court ruled that because the insurer had requested the examination under oath prior to the lawsuit, the examination under oath was a condition precedent to filing suit. Therefore, the Court determined that the insured had breached the contract and was not entitled to payment under the policy.

A much different scenario exists when the insurer does not request an examination under oath prior to the lawsuit being filed. This situation arose in Willis v. Bankers Insurance Company, 736 So.2d 1272 (Fla. 4th DCA 1999). In Willis, the Court distinguished the facts in Goldman because of the time when the examination under oath was requested. Since the insurer did not request the examination under oath until after the suit was filed, the court held that the examination under oath was not a condition precedent to filing suit. Therefore, the insured in Willis did not breach the contract by refusing to sit for the examination under oath.

In The Mind Of The Insurance Fraud Adjuster And Investigator, I made the following remarks:

Some may question why I spend time studying the insurance company's perspective. From my viewpoint, even a broken clock is right twice a day. And, I need to understand the mind of my opponent and anticipate his actions to do a better job for my clients.
...

Guy "Sandy" Burnette invited me to speak at the International Association of Special Investigation Units over a decade ago. I was the token insurance attorney for policyholders. During my presentation, I cautioned that the two major human problems facing fraud investigators would be the issue of wrongly accusing innocent people of fraud and the tendency of some in an investigative role to view everybody as a potential crook. Well meaning or not, seventeenth century witch hunts can be repeated by modern groups. If all you concentrate upon in life is uncovering fraud, you may start seeing signs of it everywhere.

When I get called about possibly working on a case where a claim is dragging along and a possibility of an examination exists, getting the insurance company to act promptly and in good faith becomes paramount. Asking who opposes the claim, why the claim has not been paid, whether there is any concern about fraud and, if so, what those fraudulent issues are, and demanding that information be exchanged informally or through a prompt examination under oath moves the matter along. These demands should be made politely and cooperatively, trying to get payment while still pointing out the seriousness of not having a prompt adjustment.

Given the facts of the case, this ruling is not earth shattering. What will create a great deal of litigation and a lot of gamesmanship during the adjustment of claims is the following language of the decision:

Furthermore, granting appraisal of the items of loss in the insured's cross-appeal was premature as those items had yet to be adjusted. Without adjustment, it is impossible to know whether the parties disputed the amount of loss to warrant appraisal. See United States Fidelity & Guar. Co. v. Romay, 744 So. 2d 467, 469-70 (Fla. 3d DCA 1999).

What exactly does that mean? I anticipate that claims will drag on forever, as insurers will claim that the actions of the parties have not concluded in an "adjustment." Investigations already seem delayed and unnecessarily long from the policyholder's standpoint. Now, insurers can argue that various portions of a claim are not ripe for appraisal or litigation because they have not been "adjusted."

Nowhere in the policy does it require that the entirety of every item claimed must be "adjusted" before an appraisal is demanded or a lawsuit filed. All that has to happen to trigger appraisal is a disagreement on "the amount of loss." It would seem that here, where the insurer has had notice of the loss and after five months the parties could not agree upon "the amount of loss," even after a settlement meeting and a check was issued for the undisputed amounts, everything in dispute or which could be at issue should be determined through appraisal, if timely demanded and not waived. I disagree with the second quoted portion of this decision.

This decision will certainly lead to greater delays and nitpicking of issues by insurers wishing to drag out the time when resolution of amounts of loss will be determined.

A public insurance adjuster asked that the following question be addressed at our September 11 Seminar, Hurricane Ike-What a Difference A Year Makes?:

When the insurer calls in the Engineer for an opinion and the insurer uses that opinion as an excuse to drag out a claim for several more months, is the insured and the insured’s public adjuster entitled to the engineer’s report? What is a reasonable time to wait for a report to be completed? We were told that we have no right to the report.

Instances such as this demonstrate why there is a strong need for laws that protect insurance consumers. Without fair claims laws, some insurers give into the temptation to cheat their own customers at the most opportunistic time—following a loss. Most insurance companies that are truly consumer oriented and honest have no trouble turning over these reports and even the drafts. For them, good faith is part of their company claims culture. Honesty requires transparency rather than one party to a contract advantageously keeping secrets. Does anybody disagree?

The Restatement (Second) of Contracts § 205, Duty Of Good Faith And Fair Dealing provides:

Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.

At comment d., the Restatement provides:

Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. But the obligation goes further: bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.

These are legal principals many would anticipate the law requires. The problem is that many of my colleagues and I fail to discuss them, and the insurance company attorneys are not about to do so, since they are trying to defend their client’s bad faith actions. It is their job to protect those types as much as it is my job to call them out.

Courts in states throughout the nation have concluded that all contracts-- including insurance policies--impose on each party an implied obligation to act fairly and in good faith. For example, in 1930, the Wisconsin Supreme Court stated that the rights of the insured “go deeper than the mere surface of the contract written for him by the defendant” and implied obligations are imposed “based upon those principles of fair dealing which enter into every contract.” The New Jersey Supreme Court's decision in Bowler v. Fidelity & Casualty Co. of New York, which involved a time limitation on the right to sue under a disability insurance contract, provides an excellent summary of how some courts view this duty:

Insurance policies are contracts of the utmost good faith and must be administered and performed as such by the insurer. Good faith “demands that the insurer deal with laymen as laymen and not as experts in the subtleties of law and underwriting.” In all insurance contracts, particularly where the language expressing the extent of the coverage may be deceptive to the ordinary layman, there is an implied covenant of good faith and fair dealing that the insurer will not do anything to injure the right of its policyholder to receive the benefits of his contract.

So, the answer is that insurers should turn over those reports. They should make certain those engineers are working as fast as possible knowing that claims require promptness. They should not hire consultants that are overtaxed, given the nature of the promptness required of claims investigation and evaluation. My experience is that many consultants never get asked this question regarding the promptness of work, but instead have other criteria which seem to be more important to many claims departments.

To be fair, in situations where the insurer legitimately has reason to be concerned about fraud, the timing of turning over reports and information can be somewhat changed. A bad actor may be given additional opportunity to change or escape the scheme if the reports or information are promptly turned over. Many courts have recognized various “work product” protections in similar situations and especially when insurers have retained counsel to help protect them. I am certain that expert insurance fraud attorneys such as Barry Zalma and Sandy Burnette could provide much greater information on that topic.

State Farm gets bashed too often at times. In March 2007, I took the deposition of one of its Home Office Bloomington based claims consultants, Stephan Hinkle. He indicated that he expected all reports, including drafts before modifications, to be turned over to policyholders. As I recall his deposition, I felt he understood that honesty was important to State Farm’s customer although the final decision might not be favorable. The transparency of the logical basis for denial of a claim or part of it is extraordinarily significant and will usually be found in the information Hinkle expected would be turned over.

In my experience, many adjusters refuse to operate this way. Therefore, the question posed above is repeatedly asked.

This is the comment from Insurance Veteran that sparked this post:

“After thirty six years as an adjuster, insurance company claims manager, and head of a major restoration firm, I've looked at this issue from a multitude of vantage points.

Sometimes, the insured is seeking an outcome incompatible with the policy conditions. Hoping for renovations to unaffected areas, repairing damages caused by non-insured perils, and other similar unrealistic expectations, very frequently contribute to the "unhappy" syndrome.

I've also worked as a Public Adjuster and do not view this issue from one side of the fence. If an insured retains a knowledgeable, honest appraiser, the system does normally work.

Unfortunately, Christmas does only come once a year.”

Whether or not I agree with the comment, I have to respect anybody who has given thirty-six years of their adult life to the insurance business. Some of my policyholder colleagues have found it curious that I would allow a post, Sandy Burnette Defends Insurance Fraud Fighters, where the people that deny my clients’ claims are praised. But I feel that insurance fraud is wrong and, as unfortunate as it is, there is a true need for good, hardworking people devoted to catching fraudulent insureds.

Insurance is a fantastic product. Unfortunately, those who work for insurers are sometimes unfairly demonized simply because their work is not always consistent with policyholder interests. I am to blame for this at times.

I learn a lot from people like Insurance Veteran. Much of their knowledge is based on experience and learning at a level in the industry with which I have little contact. When people like Insurance Veteran explain how different carriers, contractors, and adjusters think and work through issues, it adds a bit of knowledge. If correct, I can use that knowledge to better understand issues and do my job for policyholders.

For example, I spent the last two Fridays working with a former State Farm adjuster who worked as a claim reinspector. His stories regarding the inner workings of how that job functioned, how his performance was criticized, who did the criticizing, and his job frustrations and joys lead me to a better understanding of an entity with which my law firm is in frequent litigation. His knowledge of State Farm’s current claims management, claims personnel, and claims processes provided me with a more accurate understanding of the industry.

So, to all insurance industry readers who want to make a comment, do not be afraid to make a point. Simply make up an alias if you want to remain anonymous. Many in the insurance industry who meet me actually find that, despite my pointed lawsuits and rhetoric, we can agree on many issues-- even if they cannot be seen talking with me (fear of reprisal). I have quite a bit more freedom because my clients do not care who I talk with, so long as I show them the money at the end of the dispute.

Insurance Veteran made a point that everybody in the insurance business knows. There are certain policyholders who want much more than what is fairly owed, and they unrealistically believe they are entitled to the money. Some of these people go over the top and commit fraud. Others just want magic to happen, and the claims money to be paid regardless of any justification.

While I can certainly appreciate his comment, he may have missed part of the point of my post. Many policyholder appraisers do not fully understand how to win the apprasial for the policyholder. They do not comprehend that the appraisal is truly an alternative dispute process that binds the policyholder.

Some may suggest that I am wrong, and that the goal of appraisal is a fair number for both sides. But, my policyholder clients may have a very different view of what fair is. So, if the insurer wants to dispute the amount in an appraisal, I want as much as I can get for my clients. After all, if there were no appraisal, my client would be asking a jury of peers for justice. But the insurance companies were historically so afraid of juries and costs, that a hybrid dispute process became standard in form insurance policies. Guess who benefitted most from that process?

Accordingly, my warning to all policyholders and those working with them in appraisals is that it is binding and should be taken as seriously as a public trial. I want the mindset of policyholders faced with an appraisal to be:

There is no second chance.

I started writing a reply that I feel better explains my impressions on this topic. Some suggest that I am opposed to appraisals for a number of reasons, including the possible loss of litigation revenue. These people do not fully understanding the consequences of appraisal. I have a hard time explaining the historical importance of a jury as a core concept of American democracy, but I believe that giving up the right to a jury trial is the most important consequence of appraisal. Justice comes from the values of one’s peers in the community, not experts or government deciding what is fair and just. This is a fundamental concept of American democracy and protected by our Constitution.

Yet, if some courts and states deem a procedure without a jury and without rules to determine what a policyholder will obtain as “fair,” I have some very strong opinions about what policyholders should do and how appraisers selected by policyholders should go about their work:

“Veteran,

I appreciate the view and you taking the time to share it.

Yes, sometimes policyholders have an unrealistic viewpoint. Sometimes, the appraisal process, whether informal or formal, results in awards where the policyholder has a poor result. Indeed, it happens in Courtrooms as well where the insurer simply prevails and the policyholder loses. No process guarantees a perfect and accurate judgment from differing evidence. That is reserved for the Almighty.

The policyholder has no protection in an informal appraisal process if the policyholder is ignorant. If a policyholder fails to obtain a very good appraiser as well as professional preparation of the evidence supporting damage, my impression is that insurers typically get a result with a far smaller award than when policyholders get the "right" appraiser and use professionals to provide, and work with, the appraiser towards a strategically prepared presentation to an Umpire.

My impression is that many policyholders in Florida come away with a good result because there is a very active public adjuster industry and knowledgeable policyholder bar that have experience with how to go about presenting evidence in an informal appraisal procedure so that policyholder recovery is fully realized.

This was not the case fifteen years ago in Florida nor in many other states today. In some situations, I have been approached for representation by policyholders, following a poor award, where they selected appraisers that are realtors, from restoration contractors that are on the insurers preferred vendor list, independent adjusters, and contractors with little insurance understanding that a simple estimate is generally going to result in an award far lower than what should have been obtained. If you select the wrong appraiser as a policyholder, you will lose.

The harder you work preparing an appraisal as if it were a full blown trial with a twist that it is not a trial, the better the results are generally obtained. Time, money and thoughtful preparation supporting the claimed amount as well as thoughtful preparation of rebuttal evidence is crucial to enhancing recovery for policyholders.

Selection of the Umpire is also important. Some umpires are slow and lazy. They take a lot of time to split differences. Some umpires are concerned about pleasing one side or the other--unfair awards may result. Ignorant appraisers sometimes agree to insurance industry Umpires. Getting the "right" umpire can make the difference between winning, having a so-so result, and getting killed because the "fix" is in. This is the real world of "Umpire shopping" that goes on everyday in the banter of the appraisal process. If a policyholder selects or has appointed the "wrong" umpire, the policyholder loses.

I applaud all Umpires that take their job seriously enough to become Certifide through the Windstorm Network and educate themselves enough to truly be worthy of what the position should be and requires.

The one aspect of all this is the right to have a jury of one's peers determine the outcome of a dispute is completely abrogated through this process. Not only are there no procedural due process safeguards for policyholders which allow them to have a right to confront those with opposing views, there are no rules at all. These basic civil protections were first provided to subjects of Kings in the Magna Carta and they exist in our Constitution.

Maybe personal Constitutional rights and the liberties all of us enjoy do not matter much in this day and age. After all, Judges trained in the law and are sworn to uphold the Constitution and the important personal right to a jury trial, make simple rules that suggest expediency and cost is more important than the Constitutional right. So, why should others care?

Many of my colleagues and myself have taken an oath to support and truly (possibly naively) believe in our jury system with set rules and procedures of fairness. My personal and professional opinion is that Kangaroo courts subject to personal arbitrary rules should not be forced upon those that do not voluntarily agree. Policyholders with adhesionary policy terms not bargained for should question the wisdom of judges to say that somebody has relinquished such important rights merely by purchasing a standard form policy.

Yet, I live with what many Courts have found. If the rule is that there are no rules, I can get into the mud with the best of anybody. All I care about for my client is winning anyway I legally can if we go to an appraisal. Absent fraud, the Courts in informal situations have just about blessed that "anything goes."

This is what I teach and preach to public adjusters that attend our workshops. Unlike an insurer to its customer, I have no obligation to be fair and act in good faith to the insurance company during the appraisal process. Instead, my legal obligation is to zealously represent my client to the best of my ability and for the interest of my client. Insurers always have an obligation to be "fair" and thus cannot legally act only in their short term economic interest if they are acting in good faith and following the regulations that bind them.

From my view, insurers wrote this clause into the policy long ago when there were few public adjusters and experienced attorneys for the policyholder. It served them well to reduce claims payments at little cost when there was futile opposition.

"The worm turns."

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?

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

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

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

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

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

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

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

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

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

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

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

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

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

"Leaking Pipe and Wet Rot"

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

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

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

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

“We do not insure, however, for loss:

2. Caused by:

e. Any of the following:

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION I - EXCLUSIONS

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

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

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

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

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

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

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

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

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

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

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

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

During a break in my presentation at the NAPIA annual conference, Depreciation Should Not Be Taken for Partial Losses That Are To Be Repaired, Dick Tutwiler, a very experienced public adjuster, approached me regarding an ethical obligation he felt I overlooked in the discussion of ethical adjustment of glass door and window claims. He explained:

Public Adjusters have an ethical obligation to submit claims only after conducting a reasonable and honest investigation. Many older glass doors and windows have normal wear and tear and pre-existing loss issues which require the public adjuster to investigate the pre-existing nature of the items rather than to simply submit a claim for all damage seen.

His point is well taken. Adjustment requires investigation and evaluation of damage as well as coverage. Adjusters, whether for the public or the insurance company, are ethically obligated to complete these two primary duties of adjustment. Public adjusters should not place their policyholder clients in the position of having to explain or answer for fraudulently appearing claims without merit because of poor or non-existent investigation into the prior nature of items before a loss occurred.

I neglected to mention this very important point. There is a concern from many leaders in the public adjustment field that the poor work of some creates a public perception that public adjusters care about one thing--how big the claim can be made. A public adjuster’s job is to accurately determine the full amount of the insured's loss. Ethical public adjusting is not a wrongly evaluated claim amount following a cursory investigation. I am certain most professional public adjusters feel the same way and expect their colleagues to perform to this standard or get out of the business in order to maintain the integrity of the profession.

Most public adjusters active in NAPIA and FAPIA have expressed Tutwiler’s concern in a number of different ways. I should have addressed it better in my recent speeches in Florida, Texas and California.

On another note, Sandy Burnette correctly made a comment where I went too far. In response to my post, Is the State Farm Policy Really Worth Anything?, Sandy Burnette made the following observation:

"While I try to resist responding to all your posts, and it sometimes takes quite a bit of restraint to hold myself back, once again I find you have crossed the proverbial line.

Your opening sentence questioning "what is the value of insurance if it doesn't cover an insured loss" is beyond misleading, it is simply untrue. By definition, an "insured loss" is covered.

Suggesting that "insured losses" are not covered by insurance companies is an oxymoron. (Yes, claims are often wrongfully denied. But we have courtrooms to make sure that is corrected.)

It makes for sensational reading when you write those things and it creates a platform for you to once again rail at insurance companies, but unfortunately it just isn't true. This post is nothing more than an expression of the belief that anything bad that happens to somebody "ought" to be covered by their insurance policy."

His comment went on far beyond this quote, but that point is well taken. I wrongly wrote the following line in the context of that post:

"What is the value of insurance if it does not pay for insured losses?"

That is a great and accurate line I have often used in bad faith cases, but not accurate where there is no coverage. I should have written:

"What is the value of insurance if the policyholder is not informed that it will cover only a few losses? How would the public perceive the value of State Farm's product if it fully advertised its positions of what is not covered under the product?"

I think the point is obvious--the value is far less. The security advertised by State Farm in no way reflects how State Farm writes exclusions into its product. Some may say that the ads are disingenuous because they do not adequately warn State Farm policyholders about the common accidental risks of loss that State Farm excludes in its product form. That was my point.  

Policyholders and the public should be made aware of this in advance rather than after purchasing the product or after the loss when it is too late to do anything about it.

I do not want State Farm to be run out of business. As the industry leader, I would hope that somebody in its very able and bright management would critically review these issues. If State Farm changes, many other carriers will do the same. If not, I hope that others with me will raise the issue and make State Farm change through public policy or by purchasing from insurance companies that do not provide false promises of security.

There are other responses to Burnette's comment that need a reply in a later post. I will try to do better in expressing my opinions and not forgetting information. Thanks to all who comment.

Bill Gross is the most famous philatelist of United States stamps. He was supposed to be there as well, but he was pulled away to a last minute meeting with Alan Greenspan and Treasury Secretary Geithner on an allegedly more important endeavor--how to save the economy.

I know that collecting stamps seems a bit nerdy. But, when you consider that I also study insurance policies and read how obscure insurance clauses are legally interpreted, it makes a little more sense. As an adult, it is now a hobby usually done in solitude with a lot of study. Similarly, I find that most good lawyers spend a lot of time studying their area of practice in quiet reflection.

At this weekend's gathering, I met Dan Walker, treasurer of the American Philatelic Association. When he learned what I do for a living, he shared an experience he had when he owned an insurance company that specialized in insuring collectibles.

A collector insured Civil War items for approximately $2.5 million. He reported a burglary of his entire collection, and Dan felt something was wrong. He hired an attorney and a SIU (fraud) adjuster just to check out the circumstances. Apparently, the collector had recently suffered a severe medical setback with diabetes. They learned that he had approached several dealers trying to sell his collection. When those dealers heard the collection was stolen, they suggested that it might be a fraud because they found most of the items to be forgeries. The SIU investigator tracked down a storage facility that rented space to the collector just before the alleged burglary.

Eventually, the insurance case became a criminal matter, and the collector was convicted of insurance fraud.

Dan said it was a very desperate and sad story of a person being "duped" into purchasing allegedly valuable collectibles without doing enough investigation to determine the authenticity of the items. Collectibles insurance does not cover the loss of market value if one purchases a forgery.

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

So always follow this rule:

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

Sandy Burnette and Barry Zelma would be happy to hear that Dan’s SIU team did such a great job. There is a need for such trained attorneys and adjusters. My sense from Dan Walker was that this was a very unique situation. He indicated that it was the only time he ever had to go into a courtroom in his twenty-two year insurance career.

I wonder why an insurer like State Farm would spend so much money on advertising fraud detection. It cannot be to get people to buy State Farm policies. When you consider how few of their customers ever commit fraud, why would State Farm spend money on an advertising campaign about fraud?

For example, State Farm advertised that it provided arson dogs to investigators. I cannot imagine somebody reading that advertisement and saying, "Edna, let's go buy some State Farm insurance because they are out to get their customers that are arsonists." What is the real purpose of that advertising campaign?

Some may suggest that State Farm and others in the insurance fraud industry make up such advertisements and statistics to raise suspicion of everybody that makes a claim. Of course, those who determine the purpose of the advertising and make up the statistics are not about to reveal their motives. Consumers should question such insurance advertisements and the potential impact upon those receiving the message.

Still, none of those concerns and thoughts mean that there is not a significant need for the hard and important work of those that investigate and detect fraudulent insurance claims. It also does not mean that we need to consider every claimant a potential crook.

Sandy Burnette and I reminisced about Butler Pappas while he was editing his Guest Blog, Sandy Burnette Defends Insurance Fraud Fighters. Sandy joined Paul Butler while I was a law clerk in 1981. The firm was then known as Butler and Neilson. Lane Neilson is still practicing insurance defense in Orlando Florida. Sandy recounts that the prior names of the current Butler Pappas have been:

Wilson and Butler

Butler and Neilson

Butler and Burnette

Butler, Burnette & Wood

Butler, Burnette, Wood & Freemon

Butler and Burnette

Butler, Burnette & Pappas

Butler and Pappas

Butler, Pappas, Weihmuller, Katz & Craig

Attorneys have a peculiar way of coming and going at law firms. Few of us, especially litigators, ever stay in one place during our entire legal career.

Paul Butler came to Tampa via Atlanta. His mentor was Clayton Farnham. Paul is an ordained Methodist minister. Like Clayton Farnham, Paul is a consummate gentleman, driven, and very bright. Like many Methodist ministers, he can touch one’s soul with eloquent rhetoric. I was at a trial he won where the jury was crying with Paul during his closing argument.

John Pappas and I were not only classmates, but also on the Law Review and Moot Court in law school. He was a hardworking student and a very competitive debater. When Paul Butler indicated that they needed to hire more attorneys because of the firm’s growth, I recommended John. I felt he would be a perfect fit for the type of practice Paul Butler was establishing. I have been proven right about that.

John Pappas is as dedicated to the insurance industry as I am to the advocacy of policyholders. It is not uncommon for tough feelings and bitter disagreements to come about between lawyers on opposite sides of a case where the stakes are high. Possibly as a result of competitiveness for our clients, John and I have not seen much of each other socially for a long time. However, while many who meet John may think he has a serious and unrelenting personality, he personally has a light sense of humor. I would encourage reading his From Beautiful Brazilians to Bear-Catchers to gain a glimpse of Pappas’ humor.

Yesterday, I replied to a comment concerning Surplus Lines Insurers, Sinkholes, and the Law of Mars. I thought a lot about how attorneys and policyholders view our opponent’s representatives and wrote in part:

“The attorney in the above cited case, Donna Devaney, represented insurance companies at one of the largest law firms in Florida. After becoming a partner and finding that status was not all it seemed when she was younger, she switched over to the policyholder side with us.

Donna has always been successful. Fortunately for her, she is now able to use her considerable talents to help people.

One of the reasons I left the representation of insurance companies in 1985 is because I did not want to go see my Maker and explain that I used my talents to help save Travelers $25 million dollars. This is not to say that I do not respect my adversaries. The vast majority of insurance counsel are very honorable, good people, and play an important role in society. However, we all have a choice to make at the endeavors we try to be successful.”

I was very fortunate to have Paul Butler as a mentor early in my career. Indeed, I may have been blessed. Without Paul teaching me this line of legal work, I would never have become an attorney for policyholders. It is interesting how one thing leads to another in life’s journey.