Policyholders with flood and all risk policies usually do not have as many problems collecting benefits following a hurricane where wind and flood damaged a structure. Those with only one policy are not so fortunate. When the combination of payments from both policies is less than the cost to repair or when delays in payments occur, numerous issues arise.
A recent Louisiana case, which will surely be a topic of discussion at the upcoming Windstorm Conference in Houston is Bradley v. Allstate Insurance Company, No. 09-30035, 2010 WL 3619863 (5th Cir. La. Sept. 20, 2010). The case vacated a prior opinion and is worthy of study because it involves many issues. One topic is that insurers are allowing their counsel to argue contrary to their own internal claims manuals just to lower the amounts owed to customers.
For example, nowhere in Allstate’s property claims manuals is actual cash value defined as market value of a structure because Allstate does not consider market value when selling its product that insures the cost to replace or repair. Yet, to win the case, Allstate, and many other insurers, will allow their attorneys to argue almost anything. Unfortunately, jurists who might not fully understand the insurance product and law sometimes agree with their arguments. In a “whatever it takes to win the case” mentality rather than honest debate, insurance attorneys treat insurance company customers as third parties rather than individuals who deserve good faith treatment. The Court noted the actual cash value issue as follows:
The district court found that the ACV of the Bradleys’ home was $97,000 because the market value of the Bradleys’ home at the time that it was destroyed did not exceed $97,000. Allstate contends that the district court correctly determined the ACV of the Bradleys’ home based on its pre-storm value and appropriately held that they were not entitled to recover further payment under their homeowners policy. The Bradleys argue that ACV is properly calculated as the replacement value of the home less depreciation, but that-regardless-ACV is not the correct measure of their potential recovery.
Fortunately, the Fifth Circuit did not follow the District Court or Allstate’s attorneys when construing Louisiana law defining actual cash value of a structure:
ACV is computed as the cost of replacing the building as it existed at the time of the accident, taking into account the replacement costs within a reasonable time after the accident, minus depreciation. The district court erred by calculating ACV based on the pre-storm market value of the house.
In most states and for most property insurance policies, this is the correct definition of actual cash value and basis for payment where the building is not being repaired. First, note that the time of determination is a reasonable time after the loss. Since one can only repair or replace after the loss, this is important. Some cases wrongly suggest that the time of the loss or just before the loss occurs is the correct measure. What would be the cost of replacing a structure during Hurricane Katrina? Pretty expensive. Making the value dependent on market conditions just before the loss will often shortchange the policyholder. No insurance companies get construction pricing before the loss, although their attorneys will often argue this point based on improperly worded cases.
The double recovery issue is correct on one point and very troubling on the second point because it encourages insurance companies to pay too little and too late.
In order to determine whether there has been a double recovery by an insured party, the court must ascertain actual loss relative to amounts already recovered under the homeowners policy and other insurance coverage. In the context of evaluating double recovery-or whether any of the insured’s losses remain uncompensated-the insured’s scope of recovery is measured by the actual loss, not by the total amount of insurance coverage.
A review of decisions under Louisiana law demonstrates that actual loss has alternately been measured by the cost of repair, replacement, or ACV-depending on the circumstances of each case….Recovery for up to the amount of replacement costs turns on whether those additional costs have been or will be incurred. Using replacement costs as the measure of actual loss only in such limited circumstances squares with the general principles of double recovery; replacement costs constitute recovery of a different element of damages than ACV….(“Louisiana law does not allow for double recovery of the same element of damages”). Where contested, the proper measure of actual loss, like the measure of recovery under the policy, is a question of fact….
Here, however, it is undisputed that the Bradleys have not repaired, rebuilt, or replaced the Tennessee Street property within the two-year period allowed under the policy and Louisiana law. See Versai Mgmt. Corp. v. Clarendon Am. Ins. Co., 597 F.3d 729, 737 (5th Cir. 2010) (“Versai’s claim for replacement costs likewise was properly dismissed because Versai has not completed repairs on its property as required by the insurance policy.”); La. Dept. Ins., Directive 195… Thus, as a matter of law, the appropriate measure of the Bradleys’ actual loss is the ACV of the property-not the cost to rebuild or replace the property. The fact-finder must determine, or the parties may stipulate, the ACV of the property. Subtracting insurance payments already received results in the losses still recoverable under the homeowners policy, subject to the policy limits.
Because the district court treated ACV as synonymous with the pre-storm market value of the Bradleys’ home, it incorrectly held that there was no evidence suggesting the Bradleys had uncompensated losses. (citations omitted and emphasis added)
Insurers often argue that they should not pay the full amount of replacement or repair cost until they are incurred. Under the pseudo replacement cost policies where only actual cash value is paid until the repair or replacement is incurred, this view has merit. These policies are not true replacement cost policies because repair or replacement has to be made before the policy pays those sums. Unlike other true replacement cost policies that insurers sell and pay replacement right away, these insurers deceptively sell a replacement cost insurance product that is not a replacement cost product. These insurers should not be allowed to market their product as “replacement” because that is deceptive, as this ruling demonstrates. Those products are contingent replacement cost products. This is especially true since these insurers with contingent replacement cost policies may escape full liability by delaying payment or paying too little — effectively preventing most insureds from receiving the replacement benefit.
Allstate, State Farm, Nationwide and other major insurers, as well as their agents, should start being honest about what they sell. They should honestly state that they market an insurance product that is inferior to a true replacement cost policy and that they sell a “contingent replacement cost policy.” It is not fair that they market and suggest that their product is like others which provide full replacement costs right away. Most consumers are amazed when I tell them that they do not get replacement cost benefits right away and become furious when they learn they have been duped. Everybody in the claims business knows this, but nobody regulating the honest selling of insurance seems to be taking notice.
The Court’s double recovery analysis was long, strained, and, except for the second sentence, fairly logical:
An insured “whose property sustains damage from flood and wind can clearly recover for his or her segregable wind and flood damages except to the extent that he seeks to recover twice for the same loss.” … Insureds are entitled to recover any previously uncompensated losses that are covered by their homeowners policy and which, when combined with their flood proceeds, do not exceed the value of their property…The homeowners and flood insurance policies provide distinct coverages; each protects against a different form of damage…The interplay between the segregation of flood and wind losses and the double recovery rule ensures that proper adjustment by the insurance companies or segregation of covered and excluded damages will, in theory, prevent the insured from receiving a double recovery.
But payments under flood policies, like any insurance disbursement, may not always be entirely accurate. Fundamentally, Allstate and the Bradleys dispute who receives the potential windfall from an overpayment by the flood policy. As the Bradleys advocate, by first segregating losses into those covered by wind and flood, and allowing the insured to collect all the proceeds for losses caused by wind-regardless of prior payments from flood insurance-the insured would receive the benefit of an overpayment by the flood insurance. If the insured were to collect flood overpayments plus the correct wind payments, recovery under wind and flood insurance coverages combined would exceed actual losses; the insured would be receiving an unlawful double recovery.
Therefore, the district court first evaluates whether the insured has already been fully compensated by payments under wind and flood insurance. If the court concludes that the homeowners’ insurer is not liable for further payments to the insured because additional payments would result in a double recovery, then the homeowners’ insurer effectively receives the benefit of the overpayment by the flood insurance. Whether “the flood insurance overpayments … would have to later be returned to the federal government is not at issue here….”
Because Louisiana’s double recovery bar prevents the insured from recovering in excess of actual loss, a district court does not necessarily err by evaluating double recovery prior to the resolution of disputed issues of causation. Where the value of the property in question has been conclusively established, a district court may find as a matter of law that the insured is limited to a specific recovery….But where the insurer has not conclusively established the value of the property-as here-the court cannot find as a matter of law that the insured is limited to a specific recovery based on the insurer’s asserted valuation of the property.
…For the reasons discussed above, depending on the factual determinations of the district court on remand as to the predominant cause of the damage to the Bradleys’ property, either: (1) the total loss provision in section 5(e) will dictate that the Bradleys are entitled to recover the full policy limits for covered losses; or (2) the ACV provision in section 5(b) will dictate that the Bradleys are entitled to recover the ACV of their home, replacement cost minus depreciation. Under either section 5(e) or (b), the Bradleys’ recovery will be subject to the prohibition against double recovery. In some instances, whether additional recovery leads to a double recovery depends on whether actual loss is calculated based on rebuilding or replacement costs, or ACV. The appropriate measure of actual loss does not present a question of fact here, however, because the allowable period for the Bradleys to recover rebuilding or replacement costs has expired and they have failed to rebuild or replace-therefore ACV is the proper measure of actual loss as a matter of law. Upon remand, the fact-finder must arrive at the proper figure for ACV to establish the amount of actual loss. As long as the Bradleys’ combined recovery under their homeowners and flood policies is less than their actual loss, then the double recovery rule does not preclude the Bradleys from receiving additional compensation under their homeowners policy.
Assuming the double recovery rule does not bar further payments to the Bradleys, then they are entitled to recover up to the policy limits of the homeowners policy. But while the Bradleys would preliminarily be entitled to recovery, deductions may be made by Allstate for excluded losses. The losses attributable to excluded events, specifically flood-related damages, raise factual questions inappropriate for summary judgment. Under the Dickerson framework, Allstate bears the burden of establishing how much of the total loss is attributable to flood damage. The Bradleys’ policy, of course, contains one additional, crucial limitation: by the explicit terms of the contract, Allstate is liable for no more than the stated policy limits regardless of the extent of the Bradleys’ loss. (citation omitted and emphasis added)
I have often said that my clients are entitled to the cost to rebuild their property, less payments from flood, if any, in similar situations. The Court’s loose language regarding the “value of the property” versus “value of the loss” at actual cash value or replacement is illogical considering the first part of its opinion which disposes of market value determinations. The Court got the important burden of proof right by noting that Allstate has the initial burden to prove the exclusion–Texas courts should take notice that nobody else in the country, including the insurance companies, place these burdens of proofs on policyholders under open peril coverage.
There are other important issues in this lengthy opinion. Slabbed continues to call for a true all perils policy which includes flood in its recent post, My brother Darryl and my brother Darryl – and we’re all in this together Part Trois: The multiperil drumbeat continues. An occasional series. Until that becomes a reality, the study of these cases is important whenever hurricanes cause loss with combined perils of wind and flood.