Insurance is ubiquitous, and at some point, nearly every lawyer will encounter an insurance-related issue in a matter they are handling. The two most common insurance matters will be third-party matters, commonly liability claims where a “third party” has a claim against an insured and the insurance company defends or indemnifies their insured, and first-party matters, where the insurance company owes money directly to their insured as part of some covered benefit. This article addresses the latter.
An insurance policy is a contract. Most of the rules applicable to contracts apply to an insurance policy. The insured pays a premium in exchange for the insurance company’s promise to pay when a covered cause of loss occurs. When the insurance company fails to keep its promise, the insured has a valid cause of action. However, due to the “special relationship” between insurers and insureds, created in part due to their unequal bargaining position, courts have recognized the common law duty of “good faith and fair dealing” owed by insurance companies. The breach of that duty is what is colloquially referred to as “bad faith.” This duty is based in common law, as well as statute.
TALK THE TALK
Below is some of the jargon for first-party cases.
First-Party Property Case – When a property insured sues their own property insurance company.
RCV – Replacement Cost Value. This measurement of the loss is based upon the amount it would cost to replace or repair the property with “like kind and quality” or property of “similar construction” as the policy’s particular language may vary. RCV does not include any reduction for depreciation.
ACV – Actual Cash Value. ACV is RCV less depreciation. ACV is owed regardless of completion of repairs.
Depreciation Holdback – If the policy owes RCV, the carrier will determine the RCV, but initially pay only the ACV, withholding the depreciation. If the insured completes repairs, and incurs the full RCV cost, the insurance company will release the withheld depreciation, or “depreciation holdback.”
Appraisal – A provision that allows either party to invoke a stated method for determining the “amount of the loss.” The usual method calls for each party to name an appraiser to determine that amount. If the appraisers cannot agree, then they are charged with appointing an umpire to break the stalemate. A court may also appoint an umpire. The appraisal award sets the amount of the loss but does not directly determine coverage. The carrier can still deny coverage.
Cosmetic Exclusion – This exclusion says if a portion of the property (usually the roof) sustains damage that is only cosmetic but that does not affect its functionality, there is no coverage. It is typically found in policies insuring a metal roof.
EUO – Examination Under Oath. The carrier has the right to examine the insured under oath during the claim. It is not a good sign when the insurer invokes this option. It often means the carrier suspects fraud or other substantial coverage issues.
Xactimate – An estimating software that determines labor and material costs specific to the place and time of the occurrence.
Public Adjuster – A professional counterpart to the insurance company’s adjuster. PAs most often work on a contingent fee charging 10% of what they recover. Not every state allows public adjusters. Independent Adjuster – This does not mean a neutral adjuster. It means an adjuster outside the insurance company to whom the carrier had delegated the duty of adjustment.
All Peril Coverage – Also known as “all-risk” coverage, ensures the property “against all losses of a fortuitous nature unless specifically excluded.”
Named Peril Coverage – This only insures the property against specifically enumerated perils.
ALE/Loss of Use – Most residential policies provide for “Alternative Living Expenses” during reconstruction. The cost should provide for a similar living experience. Most commercial policies provide for lost profits or loss of use during reconstruction. This loss typically must be incurred to be owed.
Post-loss Duties – All policies enumerate the insured’s “duties in the event of a loss”. These include the duty to provide the insurer prompt notice of the loss, the duty to provide access to the property, and to cooperate, which can include giving documents or records, or submitting to a EUO. Failing to perform these duties could potentially extinguish coverage.
WALK THE WALK
S.O.L.
This acronym refers to the statute of limitation, but overlaps the colloquial “sh** outta luck.” As we all know, no case can survive a valid statute of limitations defense.
This inquiry is extremely state-specific. Practitioners should know the general statutes of limitation for the various causes of action. For example, Texas has a four-year statute of limitation for breach of contract, but a two-year statute for “bad faith” claims. However, most insurance policies include their own limitations periods, which are shorter than the statutory periods. These are found in the “legal action against us” section of the policy.
Some states limit how short the policy may make the contractual limitation period. For example, in Texas, a policy may not shorten the period to less than “two years and one day from the date the cause of action accrues” and any language shorter than that is invalid. Conversely, Colorado has no such limitation on a commercial policy (there is for a homeowner’s). Lastly, most policies contain a standard “legal action against us” clause in the main body of the policy but will also contain a state-specific endorsement that will modify the main form. So practitioners have two areas of the policy to search.
When does a cause of action “accrue?” Most policies state “a cause of action accrues on the date of the initial breach of our insurer’s contractual duties.” This can get tricky. If the adjuster during inspection says the damage is not covered, then 14 days later issues a denial letter, the carrier may argue that the statute started to run at the inspection. The safest course is to use the date of the occurrences as a start date. Although not technically correct, it makes certain the statute has not run as the carrier cannot be in breach on the date of occurrence.
Lastly, some states require notice be given to the carrier before filing suit. Texas requires 60 days’ notice. Florida requires 10 days.
Insurance contracts are governed by the typical rules of construction. Courts are to interpret terms by their plain and ordinary meaning and give deference to the contract as written. Courts are to read contracts as a whole, giving attention to every word so that none are rendered meaningless or superfluous. As in most contractual cases, if the language is subject to two reasonable interpretations, the contract should be interpreted in favor of coverage.
The standard policy language is: “If we and you disagree on the amount of loss, either may make demand for an appraisal of the loss. In this event, each party will select a competent and impartial appraiser and will advise the other party of the name of such appraiser within 20 days. The two appraisers will select an umpire. If appraisers cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. If there is an appraisal, we will still retain our right to deny the claim.”
Appraisal is intended to quickly determine the amount of the loss, not coverage. The carrier can still deny coverage post-appraisal. Appraisal is risky however, as there is very little law governing the conduct of the appraisers. Several states (such as Colorado) have very strict impartiality requirements for appraisers. Other states (such as Florida) do not.
Many policies are now including substantially altered language governing appraisal and place several conditions precedent to invoking appraisal. Failure to perform those conditions can result in waiver. Allstate and State Farm are two of the largest carriers with these enhanced appraisal clauses. In many of these policies, filing suit constitutes an automatic bar to appraisal. Some carriers include language making appraisal a condition precedent to filing suit.
During the adjustment of the claim, the carrier has the obligation to investigate and determine the amount of the covered loss. The insured has the duty to cooperate. The insured has the right to depend upon the work of the carrier. The insured can certainly hire its own experts on causation and cost issues but is not required to do so.
At trial, the insured has the burden of proving the amount of the covered loss. The carrier has the burden to prove the application of any exclusion. The insured then has the burden of proving an exception to the exclusion.
Discovery can provide toys not available in standard contract cases. Plaintiffs can typically obtain the entire claim file, including notes written by the adjuster during the claim process, and reserves, which are the carrier’s “snapshot” of their probable exposure at that time. Some jurisdictions, like Florida, bifurcate breach of contract from bad faith, and the claim file is not discoverable until the plaintiff succeeds in the breach of contract case.
Another potential gold source may be the underwriting file, which can contain reports documenting the condition of the property before the carrier issued the policy.
Policyholder representatives should also always request the carrier’s internal “best practices” or “claims handling” guidelines.
