Policyholders naturally want to get their property back to a pre-loss condition as soon as possible after a loss. One potential problem involves preserving evidence to protect an insurance company’s right to seek reimbursement against third parties causing the loss, which is called subrogation. One commercial policyholder failed to do so and lost its right to any insurance proceeds.

The facts in Tropic Pollo I Corp. d/b/a Tropic Pollo Restaurant v. National Specialty Insurance Company, Inc., 818 F. Supp. 2d 559 (E.D.N.Y. 2011), appear to be common following a commercial loss:

Plaintiff owns a restaurant that sells rotisserie chickens…On April 12, 2008, a greasy chicken ignited in plaintiff’s restaurant causing fire and extensive damage. Plaintiff filed a claim under the policy to recover his losses. In response, NSIC sent a claims adjuster on April 14, 2008, to observe the damage. The claims adjuster recommended that Mr. LeBow, a cause and origination specialist, further inspect plaintiff’s restaurant….April 16, 2008, Mr. LeBow conducted his initial investigation.

Mr. LeBow examined, among other things, the exhaust filters, and the chemical fire suppression system. The filters, which attach to the hood over the rotisserie, sieve the smoke before it enters the ducts. Mr. LeBow concluded that after the chicken ignited, the fire traveled through these four filters, consuming one of them, and then spread through the entire duct system. As for the suppression system, Mr. LeBow observed that the system valve was “jammed.” Specifically he observed that the suppression nozzle at the duct entry point above the rotisserie was twisted in such a way that, had it activated, it would have inadequately dispersed suppressant. However, the inner workings of the suppression system were beyond Mr. LeBow’s expertise, as such he could not make any conclusive determinations about the affect of this “jam” on the fire damage. For this reason, the investigator told plaintiff that an engineer would be coming to look at the fire remains and that plaintiff should not touch anything. Plaintiff responded by closing his restaurant to await further inspection.

Then, according to defendant, the NSIC claims adjuster reached out to potential subrogation targets, including the manufacturer of the chemical-fire suppression system. The defendant attempted to organize a joint inspection with all parties, targets, and engineers on May 14, 2008; however, plaintiff was unavailable on that date, so the meeting was rescheduled to May 22, 2008. The May 22 meeting was also rescheduled, to May 30, but this time because the NSIC-affiliated engineer was unavailable. By May 30, approximately seven weeks after the initial incident, plaintiff had removed the damaged ductwork, replaced the fire suppression system and completely cleaned the fire scene. Defendant contends that by cleaning up the fire scene and replacing the suppression system, it was unable to complete its investigation. Accordingly, NSIC denied plaintiff’s request for coverage. Plaintiff initiated this action on March 9, 2009 demanding payment for his loss. Defendant, asserts…affirmative defenses including that plaintiff…impaired defendant’s subrogation rights… [and] failed to preserve property for inspection. (case docket citations omitted)

Regarding subrogation, the policy provided:

If any person or organization to or for whom we may make payment under this Coverage Part has rights to recover damages from another, those rights are transferred to the extent of our payment. That person or organization must do everything necessary to secure our rights and must do nothing after the loss to impair them.

The Court held that the policyholder breached this provision of the policy:

It is undisputed that by May 30, approximately seven weeks after the initial incident, plaintiff had removed the damaged ductwork, replaced the fire suppression system and completely cleaned the fire scene. Since this action prevented a full inspection to be completed by the engineers and subrogation targets, plaintiff’s actions impaired defendant’s subrogation rights by, e.g., affecting defendant’s ability to meet its burden of proof in future litigation against the third-party targets. Moreover, Plaintiff’s failure to obtain the approval of defendant prior to ripping out the ductwork and replacing the suppression system, also violated his obligation to do “everything necessary” to preserve defendant’s rights. The court concludes, therefore, that plaintiff failed to comply with the plain terms of the policy. (case docket citations omitted)

The case is a warning to policyholders, public adjusters, and counsel for policyholders that clean up and other return to business operations that destroy or alter evidence could lead to a claim denial. The best practice is to get prior approval from an insurer before those activities to avoid this situation.

The ruling is harsh enough to the policyholder without the Court providing wrong legal reasoning. Sometimes, judges write too much to justify their decisions. Here is this Court’s incorrect reasoning:

[P]laintiff has not explained how seven weeks is an inordinate amount of time under the circumstances presented by this case, particularly in light of the mores and business practices of the insurance industry, and nothing in the record suggests so. In fact, the record suggests that defendant was diligently conducting the investigation. Lastly, if plaintiff wanted to guard against lost profits, it could have bargained for such a provision in the policy. (emphasis added)

 Seven weeks of lost revenue can force many businesses into bankruptcy, and commercial insurers understand that cash is blood to a commercial enterprise. Commercial claims adjusters should be required to immediately investigate facts, evaluate damages and work with businesses on survivability plans through extra expense payments and mitigation efforts. Fast investigation of possible subrogation is paramount because delay often destroys otherwise fully insured businesses.

There is nothing prompt about a seven week claims investigation of a fire. If the policyholder caused the delay and breached the policy by its own action, that could be a basis for claim denial. But, the Court should never have justified the insurer’s slow claims investigation – it occurs too often.

Finally, the number of commercial policyholders that can demand specific insurance contract terms is negligible. Virtually all insurance policies are sold on a take it or leave it basis, where the insurer does not even provide the actual policy until after purchase. The exact policy wording is rarely bargained for prior to purchase through a manuscript form. The Court’s statement about the ability of policyholders to bargain for specific wording is untrue in most cases; only the largest commercial policyholders, usually negotiating through large brokers, can do so.