A not uncommon scenario: after examining the charred debris of a property fire, investigators note that the building’s alarm failed to sound and automatic sprinkler system similarly failed to activate because neither had been inspected or maintained for over a year. The policy that insured the property conditioned coverage on the protective safeguards’ maintenance and functionality. The insured’s failure to satisfy these conditions bars coverage for the loss.
But the insured’s failure to satisfy the conditions does not necessarily foreclose coverage for others. Individuals or entities named under the policy’s “standard” mortgage clause or “Mortgageholders” clause in ISO forms are not subject to coverage defenses applicable to the insured, leaving insurers still potentially liable for the loss.
The standard mortgage clause was originally known as the New York mortgage clause and was recognized by New York courts in 1878 as making “the policy operate as an insurance of the mortgagors and the mortgagees separately, and to give the mortgagees the same benefit as if they had taken out a separate policy, free from the conditions imposed upon the owners, making the mortgagees responsible only for their own acts.” This theory of the “standard” mortgage has persisted and stands in contrast to the loss payee clause or “simple” mortgage clause:
Under a [loss payee] clause, a mortgagee is merely an appointee who receives insurance proceeds subject to its interest in the policy and to the extent of the insured’s right of recovery. The rights of a mortgagee under a [loss payee] clause are wholly dependent on the rights of the insured and are subject to all of the same defenses to coverage as the insured. A standard mortgage clause, on the other hand, creates a separate and independent contract between the insurer and the mortgagee. Under such circumstances, the mortgagee is liable only for its own breaches and is protected from being denied coverage based on the acts or omissions of the named insured or the insured’s noncompliance with the terms of the policy.
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Cozen O’Connor attorneys Thomas McKay III, Richard Mackowsky, Charles Jesuit, and Melissa Brill recently secured summary judgment from the United States District Court for the Eastern District of New York in favor of Great Northern Insurance Company on claims asserted by Madelaine Chocolate Novelties seeking $49.5 million in coverage for Hurricane Sandy-related losses under an “all risk” property and business interruption policy.
Madelaine manufactures seasonal foiled chocolates. It conducts its business in three buildings located in Rockaway Beach, New York, about three blocks north of the Atlantic Ocean and one block south of the Long Island Sound. On October 29, 2012, Hurricane Sandy caused substantial damage to Madelaine’s facilities mainly from the inundation of seawater that rose approximately four feet above the facilities’ slab. In addition to the property damage, Madelaine suffered a significant business income loss because it was forced to cease operations for an extended period of time extending through the 2012 holiday season. Madelaine Chocolate Novelties, Inc. v. Great Northern Insurance Company, 15 cv 5830, June 30, 2017 Report & Recommendation of U.S. Magistrate Judge Gary R. Brown, pp. 4-5.
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Texas has finally enacted statutory reforms specifically designed to combat abusive insurance litigation. Enacted primarily in response to hailstorm lawsuits, the scope of the reforms are much broader. Effective September 1, 2017, Section 542A of the Texas Insurance Code governs all lawsuits arising out of insurance claims where the damage was caused, either directly or indirectly, by the weather or other “forces of nature.”
Importantly, Section 542A finally affords insurers the opportunity to amicably resolve disputed claims without protracted litigation. However, insurers need to be prepared to make quick strategic decisions to take advantage of the law’s protections. The practical effect of Section 542A is to give insurers 60 days to “get their house in order” and make decisions that can provide generous protections from both contractual and extra-contractual liabilities.
- Changes to the 60-Day Notice Requirement
The key tenet of Section 542A is the change that it made to the pre-suit notice requirements in insurance-related litigation. For years, the Texas Insurance Code required a potential litigant to notify an insurer of the basis of the insured’s dispute at least 60 days before filing suit. The original purpose of this requirement was always to give the insurer and insured an opportunity to resolve the dispute amicably and without litigation.
The pre-suit notice requirement, however, was often ignored in practice. The only real recourse an insurer had when it did not receive the requisite notice was to have the case automatically abated until 60 days after the insured provided the notice. Automatic abatement did little to discourage plaintiffs’ lawyers from filing suit first. The case law developed in such a way that an insured could file suit, and then give the required notice while the lawsuit was pending with little consequences. Read more ›
This year was off to a positive start in the realm of property insurance with a decision out of the Second Circuit upholding an at times embattled policy provision that is found in nearly every property insurance policy: the late notice provision. Courts’ varying enforcement of such provisions has hindered insurers from enforcing rights vital to protecting their ability to start investigating a loss as quickly as possible. The opinion in Minasian v. IDS Prop. Cas. Ins. Co., 676 F. App’x 29 (2d Cir. 2017) was thus welcome news for the insurance industry, with the appeals court enforcing the late notice provision in a series of property policies which required that the insured provide its carrier prompt notice of a loss.
The Minasian case concerned insureds who made a claim on three insurers arising out of the burglary of nearly $200,000 worth of stolen goods, including jewelry. The insureds waited 86 days, which is nearly 3 months, to report the loss to their insurers, even though they had filed a police report on the day of the burglary. The three policies required that the insured to provide notice of loss to the insurer “as soon as reasonably possible,” “immediate[ly],” and “as soon as practicable.” Considering these provisions, the insurers denied coverage based on, among other reasons, the failure to give proper notice.
On appeal from the district court’s decision to uphold the denial of coverage, the Second Circuit found that the 86-day reporting delay was sufficient to bar coverage under the late notice provisions. The court explained that timely notice was a condition precedent to coverage and that without a reasonable basis for delay of notice, coverage could be denied. The Second Circuit rejected as a matter of law the insureds’ argument that extenuating circumstances – specifically, the possibility of the police recovering the property – excused compliance with the policies’ post-loss notice requirements. As the court explained, “[e]ven assuming plaintiffs held the professed belief in a possible recovery, which would not have prevented a ‘reasonable person’ from suspecting ‘the possibility of a claim.’” The opinion is consistent with other Circuit Courts which have held that unresolved issues after a loss do not excuse the insured from providing notice. See, e.g., Yacht Club on the Intracoastal Condo. Ass’n, Inc. v. Lexington Ins. Co., 599 F. App’x 875, 880 (11th Cir. 2015) (“Prompt notice is not excused because an insured might not be aware of the full extent of damage or that damage would exceed the deductible.”). Read more ›
In February, the Nebraska Supreme Court held that it is acceptable for insurance companies to depreciate labor costs when determining the actual cash value (ACV) of damaged property, even when the insurance policy does not define “actual cash value” or “depreciation.” See Henn v. American Family Mutual Insurance Co., 295 Neb. 859 (Neb. 2017). Writing for the Nebraska Supreme Court, Chief Justice Michael Heavican concluded that all relevant facts and evidence should be used to calculate ACV, and both materials and labor constitute relevant facts to consider when establishing the value of property prior to the loss.
The case dates back to a September 2011 dispute when Rosemary Henn filed a homeowner’s claim with American Family due to damage to her home’s roof vent caps, gutters, siding, fascia, screens, deck, and air-conditioning unit during a hailstorm on August 18, 2011. American Family determined that Henn’s insurance policy covered the damaged property.
American Family’s policy provided that, following a covered loss, an insured may recover “the cost to repair the damaged portion or replace the damaged building, provided repairs to the damaged portion or replacement of the damaged building are completed,” or “[i]f at the time of loss, … the building is not repaired or replaced, [American Family] will pay the actual cash value at the time of loss of the damaged portion of the building up to the limit applying to the building.” Under both options, the insured would first receive an actual cash value payment. The policy, however, did not define “actual cash value” or “depreciation.” The policy also did not describe the methods employed to calculate “actual cash value” or explain how American Family determined the difference between replacement cost value and ACV. Read more ›
Are an insurer’s attorney’s fee bills discoverable in first party claims? In In re Nat’l Lloyds Ins. Co., 2017 Tex. LEXIS 522 (Tex. 2017), the Texas Supreme Court considered this question in a hail MDL dispute and answered “No” in a lengthy opinion. The opinion is the latest development in a long-running dispute over “storm chaser” claims that recently gave rise to another round of tort reform in the Texas legislature.
National Lloyds challenged the reasonableness of the insureds’ attorney’s fee claims, but did not compare its own fees to the insureds’ or seek to recover its own fees. Shortly before trial, the insureds propounded sweeping discovery regarding the insurer’s hourly rates, expenses, billing invoices, and indicia of payment. The claimants asserted that the opposing party’s attorney’s fees could be considered as a factor in determining a reasonable fee recovery. As one might expect, the insurer objected that the discovery was irrelevant and protected by attorney-client and work product privileges. The intermediate court of appeals sided with the insureds. Read more ›
Many property insurance policies that provide coverage for business interruption losses also include “extra expense” coverage for reasonable and necessary extra costs to temporarily continue as nearly as possible normal business operations, or to reduce the period of time necessary to resume normal business operations. Some policies also include provisions, sometimes referred to as mitigation provisions, which afford coverage for additional costs incurred by an insured to reduce its business income losses in the event its business operations are disrupted because of a covered loss. The differences between the two coverages, and how they might apply in the event of an otherwise covered business interruption loss, will depend on the wording of the provisions and the facts of the claim.
The U.S. District Court for the Eastern District of Arkansas recently addressed these issues in Welspun Pipes v. Liberty Mut. Ins. Co., in which the court granted Liberty Mutual summary judgment dismissing Welspun’s claim for additional costs to transfer production of specialized piping to an affiliate’s facility in India because the insured had not established the required elements for a covered “mitigation” claim.
Welspun suffered an interruption in its business due to a fire that damaged its facility in Little Rock, Arkansas, while the facility was covered by a commercial policy issued by Liberty Mutual. Before the fire, Welspun had entered into a lucrative contract with Enterprise Products Partners to provide specialized piping to be used in the Seaway Expansion Project. A fire damaged Welspun’s Little Rock facility before production of the piping began. Following the fire, Welspun asked Enterprise if it could shift production of the piping to an affiliate’s Indian facility, with all additional costs to be borne by Welspun. Enterprise agreed. Read more ›
In 2011, the California Insurance Commissioner promulgated a regulation governing replacement cost estimates for homeowners insurance (Cal. Code Regs., tit. 10, §2695.183 [the Regulation]). After the trial court and intermediate court of appeal invalidated the Regulation, this week the California Supreme Court reversed those decisions in a published decision, Association of California Insurance Companies v. Jones (Cal. Jan. 23, 2017) Case No. S226529.
The Regulation was originally enacted in response to complaints from numerous homeowners who found that they were underinsured only after disaster completely destroyed their homes. In investigating these complaints, the Department of Insurance had found that the replacement cost coverage limit recommended by a number of insurers for their policyholders had understated what was actually necessary to rebuild the insured’s home over 80 percent of the time, and that many of the replacement cost estimates by insurers failed to consider costs of replacing the foundation, debris/demolition expenses, overhead and profit, and engineering reports and architectural plans.
The Regulation does not require an insurer to recommend a particular policy limit or provide a replacement cost estimate when it was issuing or renewing a policy, but if the insurer does choose to opine on replacement costs, the Regulation specifies how that estimate is to be calculated and what factors it must include. Under the Regulation, the estimate must account for “the expenses that would reasonably be incurred to rebuild the insured structure(s) in its entirety,” including the cost of labor, building materials and supplies, overhead and profit, demolition and debris removal, and the cost of permits and architect’s plans. The estimate also must take into account “components and features of the insured structure,” including enumerated items such as the type of foundation and framing. Further, at least annually, the Regulation requires the insurer to “take reasonable steps” to verify that estimate methods are updated to reflect relevant changes. Read more ›
The preemptive effect of the National Flood Insurance Program (NFIP) on overlapping claims asserted by policyholders based on federal and state common law theories of liability is well established. “Numerous courts have held that claims other than those expressly authorized by the [National Flood Insurance Act (NFIA)] are preempted.” Slay’s Restoration, LLC v. Wright National Flood Insurance Company, Civil Action No. 4:15cv140 (E.D. Va. Jan. 3, 2017). In other words, if additional sums are allegedly owed under a Standard Flood Insurance Policy (SFIP), “the precisely drawn and detailed statutory and regulatory system in place under the NFIA and the SFIP provides the exclusive remedy.” Typically, the preemptive impact of the NFIP has been applied to preclude state court actions or state law claims challenging the denial of coverage or the handling of claims under SFIP policies.
In Slay’s Restoration, however, the Eastern District of Virginia was called upon to address a unique attempt by a non-policyholder, specifically a flood restoration company retained by the policyholder after a flood, to assert a claim under the federal Racketeer Influenced and Corrupt Organizations (RICO) Act against a Write Your Own (WYO) flood insurer and its adjusters for allegedly conspiring to fraudulently deny legitimate claims. The court rejected the non-policyholder’s attempt to fashion a RICO claim for two reasons: (1) lack of standing and (2) the preemptive effect of the NFIP.
The policyholder at issue, City Line Associates, LPs (City Line), owned 200 apartment units in 18 buildings in Newport News, Virginia that experienced flooding on September 9, 2014. Each of the buildings was insured under a separate SFIP issued by Wright National Flood Insurance Company (Wright National) as a WYO carrier. City Line contracted with First Atlantic Restoration, Inc. (First Atlantic) to remediate and repair the damage, and First Atlantic in turn subcontracted the entire scope of work to the plaintiff, Slay’s Restoration, LLC (Slay’s). City Line made 18 separate claims with Wright National for the costs associated with First Atlantic’s and Slay’s work on the impacted buildings, and Wright National dispatched an adjusting firm and its consultants to inspect and evaluate the claims. Read more ›
Does the efficient proximate cause rule serve to afford coverage for the additional costs to rebuild the foundation of a home in compliance with changed building code requirements beyond the sublimit of liability of an optional building ordinance or law endorsement? In an opinion ordered published on December 21, 2016, the Washington Court of Appeals said no, denying a homeowner the full cost of a new foundation as part of the repair of fire damage. Lesure v. Farmers Ins. Co. of Washington, Wash. App. No. 48045-0-II, 9/20/16 (ordered published 12/21/16).
Loretta Lesure insured her home under a policy issued by Farmers Insurance Company of Washington. Coverage A of the policy covered the cost to repair or replace the dwelling up to the policy limit of $112,000. The policy excluded coverage for direct or indirect loss resulting from the “[e]nforcement of any ordinance or law regulating construction, repair or demolition” of the dwelling, unless endorsed by the policy. Lesure purchased an optional endorsement that covered building code and ordinance upgrades, with a liability limit of 10% of the policy’s limit for covered property. Thus, the endorsement’s limit was $11,200.
A fire partially damaged Lesure’s home. The replacement cost estimate for the damage was $22,248.25. Because the home did not comply with current building codes, the city required that it be demolished and rebuilt to conform to code. In particular, the home required a new foundation. The estimate to rebuild her home with the code-required updated foundation was $125,397.12. Read more ›