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

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.

In a case of first impression, Essex Ins. Co. v. Eldridge Land, L.L.C., no. 14-09-619, 2010 WL 1992833 (Tex. App. - Houston [14th], May 20, 2010, pet. pending), the Texas Court of Appeals for the 14th District in Houston interpreted provisions in a commercial property insurance policy concerning vandalism and damage from theft. In Essex, Eldridge owned a vacant building insured by Essex. On March 28, 2006, Eldridge’s property sustained considerable damage when some intruders forced their way into the building and damaged sheetrock, ceiling tiles, electrical conduit boxes, and wall coverings. They also removed copper wiring and copper pipe from the building.

With respect to vandalism, the policy stated:

8. Vandalism, meaning willful and malicious damage to, or destruction of the described property. We will not pay for loss or damage . . . [c]aused by or resulting from theft, except for building damage caused by the breaking in or exiting of burglars.

Eldridge argued that: (1) the damage caused to the property in the course of removing the copper wiring and pipes was vandalism and was not excluded from coverage by the theft exclusion; (2) alternatively, the damage was caused by the intruders “breaking in” to parts of the building to retrieve the copper and thus fell under the exception to the theft exclusion; and (3) at a minimum, Eldridge’s interpretation was reasonable and the contract should be construed in its favor.

The Court construed the policy “in accordance with the ordinary rules of construction,” according to the ordinary and generally accepted meaning of the terms used unless the policy states otherwise. With respect to ambiguous policy language, the Court “construe[s] an ambiguous insurance policy strictly against the insurer and liberally in favor of the insured.”

The Court ruled in favor of the insurer for two reasons. First, the Court did not believe the language was ambiguous. Second, the Court concluded that the evidence was clear that all of the damage was done for the purpose of removing the stolen pipes and wiring, which the Court determined was not “breaking in,” and was not covered by the policy. The Court decided that the only damage covered by the policy was that caused by the intruders in entering and exiting the building – as in through a door or window.

Because Essex was a case of first impression, you should expect additional case law in the future that will better define what is and is not covered under theft exclusions. For the time being, however, be aware that insurers with policies having language addressing “breaking in or exiting” the building may attempt to disclaim coverage because of the language in this opinion.

Let's set the stage for how this happens. After a theft or a fire, the insurance company adjuster comes to the loss. One of the items orally requested from the policyholder is a list of all the lost, stolen or destroyed personal property along with all receipts. Exactly what is said becomes a major issue and some of my clients in the past have indicated that they did not make a claim for personal property items because the insurance adjuster said they had to have receipts to verify ownership, value, age, etc. Sometimes, my clients hear the instructions and think they are required to have receipts or they will not get paid.

I have always felt that the proper instruction from an honest insurance adjuster knowing that most people do not keep records or receipts of their covered "stuff" is:

The insurance policy allows us to ask for all the documents you have that help verify the loss. If you have any receipts for the items you are claiming, I would like to see those originals. If I need a copy, I will pay you for the cost of the copy. Please do not think that you have to have a receipt of the purchase of any personal property item you are making claim for, but if you do, I have to see it as soon as possible. Regarding your purchase of replacement items for those that are lost, the policy does require you to keep those documents of purchase and those receipts. You have to keep those post-loss purchase receipts as a condition under the policy to get replacement cost benefits."

(Note: In Florida, a homeowner insured with an admitted carrier gets replacement cost of personal property right away, so that instruction is not entirely accurate in Florida.)

Some insurance adjusters fail to make the highlighted portion clear to the policyholder. Some policyholders fail to hear it. And as a result, invoices are made up or somehow obtained that are not the original but a fabrication. Special Investigative Unit (SIU) adjusters love this game of finding the fraudulent invoice. While I have no problem of them catching frauds, I hate when otherwise honest people are baited into a needless situation of committing a fraudulent act just to get what is already owed to them.

The Claims Magazine article could be such a case or it could be a case of a person trying to justify an intentionally inflated claim:

When Gayland Anthony Oliver suffered a structure fire to his Greensboro, N.C., home in May 2009, he is alleged to have used the opportunity to pad his claim with some pretty fancy duds.

...Oliver claimed that $8,100 in custom-tailored suits had been destroyed in the structure fire. However, State Farm Fire and Casualty Company found the claim suspicious and conducted an investigation. They discovered that the invoices submitted for payment were fraudulent and did not reflect the true cost of the suits.

Oliver was arrested for submitting false claims to his insurance company....

Corey Harris' post was accurate, but there are many of the same traps for the honest policyholder in the theft scenario. The insurance company has many valid reasons to require that the police are notified following a theft loss. Three of those are:

1. Theft is not only a crime against the owner, but one against society. Finding thieves and placing them behind bars helps everybody, including insurance companies and their customers.
2. The police often recover stolen items. To that extent, the recovery of stolen items mitigates the insurer's loss and if recovered soon enough, the policyholder's loss as well.
3. Theft always has a component of a moral risk to the insurer. A few policyholders stage, hide or otherwise claim that a loss occurred as a result of theft caused by a third party when it simply is not true. Unlike a natural disaster, there is always a possibility of fraudulent theft. The requirement to notify the police helps prevent such from occurring, increases the probability of finding it, and therefore reduces the "moral hazard."

The police may ask for a list of what was stolen and the "value" of those items. The important thing for the honest policyholder is to get a revised list to the police if either the items or values change so that the SIU guys do not start asking about discrepancies. They will often check, and they may inquire as to significant differences. If numerous items are stolen, most people will not realize what is missing until they conduct an inventory of what is left and try to remember what may be missing. Sometimes, people simply forget what items they owned or realize that items in another part of their structure were also stolen until they look for them. The important thing is to keep the insurance company and police informed and with the same information about the changes and why the changes are being made.

And always remember, two wrongs never make a right. Never make up an invoice and never claim more than the full value of an item just because the insurance company may threaten not to pay or pay enough. When the insurer does not conduct itself in the right manner, I bet you can guess the type of professional that should be called to do something about that.

A small theft claim, for instance, may not seem like something that must be reported to the police, however, it is always better to be safe than sorry. Sure, many times the items stolen may be worth less than the policy deductible, but what happens if more items come up missing later? Often, policyholders do not notice that some items are missing until long after a burglary or theft, and failing to notify the police could create issues with the insurance company covering the loss.

Policyholders should also make sure to understand that notifying the police of a loss does not relieve them of their duty to report the loss to the insurer. As discussed in previous posts, if the insurer is not given notice of the loss, coverage could be denied.

The best practice when dealing with a potential theft loss is to immediately notify the police and insurance company. Most insurers closely evaluate theft claims many with an eye towards fraud. If notice is not given to the police or is unreasonably late, the insurer will likely take a more skeptical view. This can cause substantial delays, even if coverage is ultimately not denied.

With that said, this will conclude my posts on Notice of Loss. I have received some great questions and comments both on this blog and by email. I really appreciate those of you who take time to read my posts. While I will be moving on to other post-loss duties, if anyone has any questions about notice or any other topic I cover, please do not hesitate to contact me.

First, when a theft loss avails itself to you, look at it through a lens of common sense. Are the circumstances asserted by the claimant plausible? Was there forced entry, for example? Simply stated, if the facts do not bear scrutiny, pass on it. Any decent insurance defense attorney will harp on inconsistencies at an EUO. The claim mentioned above is an excellent example. Think about things logistically, that is, in order for a burglar to steal furniture, they need assistance moving the furniture, a truck to transport it, and a place to store it until it may be sold. Primarily speaking, three guys moving furniture into a large truck is substantially more likely to be seen than a lone thief in the night pocketing jewelry. Further, it is not very plausible that petty criminals have access to moving trucks and warehouses for storage. Finally, do thieves typically take the time to inspect power tools, leaving their casings behind? Of course not, they would simply take case and all. These points may seem picky, but they are precisely the type of suspicious facts that carriers will exploit and, often, ring true with jurors.

Especially in today’s economic climate, there will be no doubt that the insured’s finances will be poured over with a fine-tooth comb by defense counsel. Be prepared to give tax records, income documents, records of debts, etc. and, YES, the carrier does have the right to ask for them. Now this does not mean that legitimate theft losses do not happen to people in financial trouble, but financial trouble may be a motivating factor to commit insurance fraud. To those ends, the insurance professional looking at a suspicious theft loss must be extremely mindful of the list of stolen contents, as this is often the source of big problems. All too often, policyholders are tempted to exaggerate just a bit on that contents list. This is usually done in three ways: adding items that simply did not exist, changing an item’s value, or changing the age of the item in order to thwart potential depreciation. Take care to make sure the policyholder is not stating that they purchased $25,000 in contents in the last 12 months with a $35,000 salary, for example, or that they purchased several big-ticket items within the past year but with no savings and little disposable income.

Finally, the carrier will ask for receipts and proof of purchase for every single item claimed in a theft loss. It is very important to provide these receipts to substantiate the claim. What if the client can not locate receipts? I guarantee the insurer will say they are unable to pay for items which are not substantiated by receipts. This is complete foolishness. Most people do not retain receipts for every item they own. Further, I know of no policy provision stating, “no receipt, no payment,” rather, there are plenty of other methods to justify contents. Photographs, owner’s manuals, affidavits from people who can confirm the contents etc., all may be used to justify contents… so long as they actually existed!

Tune in next week insurance fans when we discuss 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.

Underwriters sought declaratory judgment in the U.S. District Court for the Southern District of Texas, arguing it had no duty to indemnify the Laws' claim based on the theft exclusion in the policy. The Laws counter-sued, seeking declaratory judgment that their claim was covered under the vandalism exception to the theft exclusion. The District Court granted the Laws' motion, finding coverage under the ingress/egress exception to the theft exclusion, and awarded the Laws $177,150.00. The Fifth Circuit Court of Appeals reversed.

On appeal, the Laws' argued that the damage was covered by the vandalism provision of the policy as well as the ingress/egress exception. The Court of Appeals looked to Texas law to decide the issue. Under Texas law, the Court was required to interpret the contract in a manner that gives effect to every provision and to the "intention of the parties as expressed in the instrument." Words not defined are to be understood "according to their plain and ordinary meaning. Any ambiguity is construed in favor of the insured.

The policy defined vandalism as "willful and malicious damage to, or destruction of, the described property," but specifically excluded damage caused by or resulting from theft. The policy did, however, provide an exception for the theft exclusion if the loss was caused by "the breaking in or exiting of burglars."

Focusing on the policy's language defining vandalism, "willful and malicious" (emphasis added), the Court concluded that the interpretation of the provisions turned on the purpose for which the damage was done. The Court then reasoned that vandalism was damage done for no purpose other than to destroy property. Thus, incidental damage done in furtherance of a thievery was not vandalism. Because the damage to the air-conditioning units was done to steal the copper coils, it was not done solely to damage the property, and was not covered under the vandalism provision.

The Court then turned to the policy's "breaking in or exiting" exception to the theft exclusion. Again, the Court found no ambiguity and interpreted the policy's language according to its plain meaning. In Texas, “breaking in” is commonly understood by Texas courts as burglary. Texas Penal Code Ann. § 30.02 (2008) provides, in pertinent part, that a "burglar" is one who, without the owner's consent,

"(1) enters a habitation, or a building (or any portion of a building) not then open to the public with intent to commit a felony, theft, or an assault; . . . (3) enters a building or habitation and commits or attempts to commit a felony, theft, or an assault."

The Court rejected the Law’s argument that the air conditioning units’ casings were fixtures, and since fixtures were covered under the policy, the damage to the casings was covered. The Court concluded that the plain meaning of the policy's "breaking in or exiting" language was intended to cover damage by burglars gaining entry into the interior of the building. Because the damage did not occur while the thieves entered or exited the building itself, the thieves were not burglars. Thus, unfortunately for the Laws, the Court concluded that the parties did not intend to extend the policy's "breaking in or exiting" exception "to include damage caused by rooftop thieves to freestanding air-conditioning units." Accordingly, the Court reversed the district court's judgment and held that the air-conditioning unit damage was not covered under the policy.

You can read the full opinion by clicking here.