With the number of properties being transferred and sold in today’s real estate economy, many buyers and sellers face new challenges regarding property damage and bad faith claims against insurance companies. This week, I write about a case that addresses whether a prior owner can assert both breach of contract and bad faith claims against a carrier after selling the property at issue.
On March 25, 2005, Mr. and Mrs. Martin entered into a contract to purchase a home from Mr. and Mrs. Matusiak. In connection with the sale of the home, the property was inspected and there was no hail damage to the roof. A few weeks later, a hailstorm damaged the house’s roof, but neither the Martins nor the Matusiaks were aware of the damage. The sale of the home closed on May 17, 2005.
In September of 2005, the Martins learned that their roof had sustained hail damage so they contacted the Matusiaks. The Matusiaks filed a claim with American Family Mutual Insurance Company and the Martins received two estimates for the repair of the roof, one for $7,834 and the other for $8,643. American Family denied the Matusiaks’ claim on grounds that they did not suffer a loss, so the Matusiaks sued American Family for breach of contract and bad faith. The trial court ruled in favor of the Matusiaks and ordered to American Family pay them $8,643.
American Family appealed the lower court’s award of damages to the Matusiaks, claiming that because the Matusiaks sold their house to the Martins for the agreed-upon price in the purchase contract, despite the intervening hail damage, the Matusiaks bore none of the costs of that damage and did not suffer a loss. The Appellate Court did not agree with American Family.
American Family’s policy provided the Matusiaks with two types of coverage:
Procedures to Claim Replacement Coverage.
If you receive an actual cash value settlement for damaged or stolen property covered by replacement coverage and you have not reached your limit, you may make a further claim under this condition for any additional payment on a replacement cost basis provided:
(1) you notify us within 180 days after the loss of your decision to repair or replace the damaged or stolen property; and
(2) repair or replacement is completed within one year of the date of loss.
The Court explained that this provision means that the Matusiaks cannot seek replacement coverage unless they first receive payment for the actual cash value of the loss, which did not happen because American Family denied the claim. The question, then, is whether the Matusiaks were entitled to a cash value settlement that they did not receive, which would require them to establish that they suffered a “loss” under the terms of the insurance contract and in the context of cash value coverage.
The Matusiaks had evidence that they suffered a loss because they pledged to pay to repair the roof and agreed to give any insurance proceeds to the Martins. By making the foregoing pledges, the Matusiaks established a cash value loss and, therefore, American Family breached its insurance contract when denying their claim.
The lower court denied the Matusiaks’ motion for summary judgment as to bad faith. The appellate court sent the bad faith issues back to the trial court for an evaluation and ruling on bad faith subsequent to the finding that American Family breached the contract.
It is important to consider that when a property is sold, the rights to the proceeds of any pending insurance claims or for insurance claims for losses occurring before the date of purchase may create an issue if that insurance claim is pursued. It is important to buyers to inspect property before closing and to review the contract for sale regarding the rights to any insurance claims. In this case, the language of the insurance policy at issue played a key role in determining whether the prior owner had any rights.
It is also important for policyholders and their attorneys to carefully evaluate the language in the policy at issue, the law in the particular jurisdiction where the property is located, and sometimes, the documents for the purchase of a property.