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 ›
It is well-established that claim processing and wrongful denial of coverage disputes involving federal flood insurance policies belong in federal court because they present substantial questions of federal law. The U.S. District Court for the Western District of North Carolina recently applied this rule when it denied the insureds’ motion to remand a case to state court in Henderson v. Nationwide Mutual Fire Insurance Company, 3:16-CV-419, 2016 WL 5415290 (W.D.N.C. Sept. 27, 2016). The Henderson Court, however, left open the question of whether disputes solely arising out the “procurement” of federal flood insurance policies likewise involve substantial questions of federal law or are matters of state law that can properly be determined by state courts. This is an issue on which courts around the country are divided.
The National Flood Insurance Program (“NFIP”) is a federal program pursuant to which persons can purchase Standard Flood Insurance Policies (“SFIPs”). SFIPs contain terms mandated by federal regulations. They can be purchased either directly from the Federal Emergency Management Agency (“FEMA”) or from private insurance companies known as “Write Your Own” or “WYO” carriers that are authorized by federal regulation to sell and administer SFIPs under their own names. Read more ›
Principle Solutions Group, LLC, an information technology company, lost $1.717 million when it became the victim of a fraud scheme for which it sought coverage under the terms of a commercial crime policy issued by Ironshore Indemnity, Inc. The policy provided coverage for “Computer and Funds Transfer Fraud,” “resulting directly from a fraudulent instruction directing a financial institution to debit your transfer account and transfer or, pay or deliver money or securities from that account.” At issue was the meaning of the word “directly,” as it pertained to the pending claim.
The fraudulent scheme involved two imposters. One of the imposters, posing as a managing director of Principle, sent an email that appeared to have been sent from the corporate email address directing the controller of the company to arrange a wire transfer to a bank in China in order to effectuate an urgent company acquisition. The email also instructed the controller to work with an attorney, a Mr. Leach, who was representing the company being acquired, to “ensure that the wire goes out today”. The person purporting to be Mr. Leach also emailed the controller sending wiring instructions to the bank in China, and then called the controller to emphasize that they needed to complete the wire transaction that day. The controller was not able to forward an email to the financial institution to wire the funds because it required more than an email to wire funds from an account. But after taking the necessary steps to effectuate an international wire transfer, including calling Mr. Leach to verify how Mr. Leach had received the wire instructions, the controller relayed this information to the financial institution, and the financial institution released the wire. Shortly after the wire transfer was made Principle learned of the fraud but unfortunately it was too late to recover the funds before they got into the hands of the parties perpetrating the fraud. Read more ›
On August 29, 2016, the U.S. Court of Appeals for the Tenth Circuit affirmed a Colorado district court ruling that the sudden obliteration of a building in a 2013 mudslide did not constitute an “explosion” under a commercial property policy. Accordingly, coverage for the loss was barred under the policy’s “Water Exclusion Endorsement,” which excluded coverage for, among other perils, “[m]udslide or mudflow.” Although the exclusion contained an exception for resulting losses caused by “fire explosion, or sprinkler leakage,” the Tenth Circuit held that the destruction of the building did not constitute an explosion as used in the exception to the exclusion. In construing the meaning of “explosion” as used in the water exclusion, the court emphasized that “context matters,” and holding otherwise would eviscerate the exclusion for “tidal waves, tsunamis and mudslides, which all typically produce extreme forces that can smash anything in their paths . . . .” See Paros Properties LLC v. Colorado Cas. Ins. Co., 2016 WL 4502286 at *8 (10th Cir. Aug. 29, 2016).
In September 2013, torrential rainfall triggered a violent flow of water, mud, and debris to careen down a hillside into a commercial building owned by the insured, Paros Properties LLC (“Paros”). After Paros submitted a claim to its insurer, Colorado Casualty Insurance Company (“CCIC”), for roughly $1.3 million in damages, CCIC denied the claim citing the policy’s “Water Exclusion Endorsement.” In particular, CCIC took the position that the damages were caused by a mudslide, and “mudslide or mudflow” were specifically excluded by the policy. Read more ›