Calculating and Proving Loss
When faced with a property loss, lawsuit, or other claim that triggers a policyholder’s need for insurance, there are important general tactics to consider when calculating and proving a loss. Prior to the specific issues that should be considered, some general tips to remember: Organize the Right Team – Your team should consist of people familiar with your liabilities (past and future), your insurance coverage (past and present), and the issues related to the loss. Specifically, this team should have the experience necessary to calculate the loss. For example, an accountant may be necessary if you have lost business income to go with property damage. While an insurance company will do its own review and estimates, it is important for the policyholder to know and be able to support his or her loss. Calculate Each Insurance Company’s Exposure – As discussed in more detail below, a loss might trigger multiple insurance companies’ policies. In such a case, each insurance company’s exposure should be calculated separately. This may require an understanding of the different trigger theories and, often, a policyholder will find the insurance companies end up pointing the fingers at one another. Nonetheless, the policyholder should be prepared to provide support for the exposure triggered. Properly Document The Loss – Regardless of what is done, whether it is your own employees doing clean up, or the retaining of a company to drain water or any other myriad example of costs being spent, it is important for a policyholder to document its loss. Absent this documentation, a policyholder will be left with little ability to prove its loss. With these broader points in mind, it is helpful to discuss the specific issues that may arise in calculating and proving a loss.
NUMBER OF OCCURRENCES
If the loss at issue is potentially for coverage under an “occurrence” based policy, the question of number of occurrences is a highly important question. Two primary tests have been developed to determine the number of occurrences: the “cause” test and the “effect” test. A vast majority of jurisdictions, including Pennsylvania, New Jersey, and Delaware, apply the “cause” test, where courts look at the causes of the injuries to determine the number of occurrences. An example of this test is Donegal Mutual Insurance Company of Baumhammers, 938 A.2d 286 (2007). In Baumhammers, a man shot and killed five people and severely injured a sixth person over a several township area in several different incidents. A claim was filed against the man and his parents, alleging, as to the parents, negligence in allowing a known dangerous person access to guns. The court concluded that, as to the parents, the cause of the negligence was a single act – the failure to prevent their son from having access to the guns. As such, the multiple shootings constituted a single occurrence. In comparison, the “effect” test, as the name implies, looks to the effects — effectively, the number of injuries. This test is rarely used at this point, but an example of this test’s application test’s application is Lombard v. Sewerage & Water Board of New Orleans, 284 So. 2d 905 (La. 1973). In the Lombard case, the court concluded that, even though the cause of loss was a single underground drainage canal, each of the 119 homes damaged constituted a separate occurrence. Even if a court seemed interesting in applying this test, most courts interpreting the modern definition of “occurrence” have concluded that the cause test better reflects the language of the policy. For the purpose of calculating and proving a loss, determining the number of occurrence can be important and can cut both ways. Finding multiple occurrences, that each involves large losses that would reach per occurrence policy limits, would be better to prove. For example, following the 9/11 terrorist attacks, the World Trade Center owners contended that each tower constituted a separate occurrence, since the losses greatly exceeded the per occurrence limit or in the Baumhammers case, the underlying plaintiffs sought each victim be considered a separate occurrence since the losses, in total, exceeded the per occurrence limit. On the other hand, a single occurrence would be better where the total loss is below the per occurrence limit and multiple occurrences would mean multiple deductibles (possibly, none of which exceeds the deductible). For example, in Lombard, each homeowners claim was either within or barely above the deductible, so a finding of a single occurrence would have resulted in substantially more coverage than the determination of multiple occurrences. A policyholder should be mindful of this issue when proving a loss. While it is often outside of the policyholder to control the facts entirely, the “cause” or “effect” test are factual in nature and a policyholder thinking ahead can be in a better position at a later date, assuming the facts justify such a claim, for arguing a single or multiple occurrence.
TRIGGER OF COVERAGE
Trigger of coverage relates to the question of when a loss is deemed to have occurred so as to “trigger” an insurance policy. In discrete losses that only involve one policy period, this is not a major issue. For example, a first party claim for fire will likely only trigger the policy in effect at the time of the fire or a slip and fall case will likely only trigger the policy in effect at the time of the loss or the time the claim is brought, if a “claims made” policy. However, many claims are not discrete catastrophic events or single claims, but may take place over an extended period of time. In such cases, the determination of when the loss “occurred” and which policies must respond can result in complex fights between policyholders and their insurers and even between insurers. Several different “trigger” theories have developed over time to address “occurrences” and what policies are triggered. As the examples below will show, states often apply different theories in different scenarios. In Pennsylvania, courts have applied both a manifestation trigger theory and a continuous trigger theory. In New Jersey, courts have mostly applied a continuous trigger theory, but, some cases, have implied an injury-in-fact or even manifestation trigger theory may apply in some circumstances. The four primary trigger theories that typically apply, with examples from different courts are:
- The Manifestation Trigger: Policies that are in effect when the loss becomes apparent or is discovered provide coverage. Some examples of this include:
- West Am. Ins. Co. v. Endel Lindepuu, 128 F. Supp. 2d 220 (E.D. Pa. 2000): a group of homeowners sued a subcontractor alleging damage to their homes caused by defective installation of windows and doors. The court concluded that, although the loss stems from the defective installation between 1985 and 1988, the triggered policies were the ones in effect when the loss was “discovered” in the fall of 1993.
- Mid-Continent Cas. Co. v. Siena Home Corp., 2011 U.S. Dist. LEXIS 79132 (M.D. Fla. 2011): homeowner brought claim against a developer for water intrusion caused by allegedly negligent construction. The court concluded that the policy triggered was when the water intrusion manifested, not the when the alleged negligence and not, despite being a latent issue, during the multiple policy periods between the negligence and manifestation.
- The Exposure Trigger: Similar to manifestation, this trigger attempts to link latent or progressive damage to a single period, namely the time of actual exposure to the loss-causing event or substance. Some examples of this theory include:
- S. Silica of La., Inc. v. Louisiana Ins. Guar. Ass’n, 979 So. 2d 460 (La. 2008): Policyholders sought coverage for bodily injury claims resulting from inhalation and exposure to silica dust. The court concluded that, even though the injury occurred over a long period of time and did not manifest until significantly later, the policy triggered was the policy issued at the time of the exposure.
- A.W. Chesterton Co. v. Massachusetts Ins. Insolvency Fund, 838 N.E.2d 1237 (Mass. 2005): Policyholders sought coverage for bodily injury resulting from exposure to asbestos-containing materials. The court rejected an argument that asbestos-containing materials resulted in a continuing progression of the bodily injury that triggered multiple policy periods and adopted the “exposure” trigger for the policy in effect when the policyholder was exposed to or inhaled the asbestos.
- The Injury-In-Fact Trigger: Sometimes also called the “Actual Injury Trigger” theory, this theory contends that each insurance policy effective when any damage occurred is triggered, including any policies in effect from exposure to manifestation of the loss. Some examples of this theory are:
- Liberty Mut. Fire Ins. Co. v. J.T. Walker Indus., 817 F. Supp. 2d 784 (D.S.C. 2011): Policyholder sought coverage for five separate suits filed by homeowners who claimed progressive damage to homes resulting from allegedly faulty windows. The court concluded that every insurance policy in effect during the period of the progressive damage was triggered because loss occurred during each of these periods.
- Travelers Ins. Co. v. Eljer Mfg., Inc., 757 N.E.2d 481 (111. 2001): Policyholder sought coverage for several claims involving damage to property caused by allegedly defective polybutylene pipes that leaked. The court rejected an exposure argument that the physical injury occurred during installation, but concluded that the loss occurred during any policy period in which an actual injury occurred, i.e. during the policy periods where leakage occurred.
- The Continuous Trigger: As the name implies, this theory avoids determining when injury occurred and triggers all policies in effect over a set span of time. Generally, this san of time is from first “exposure” to a loss-causing product or event and continuing throughout the latent injury until the injury manifests to the policyholder. Some examples of this theory are:
- J.H. Frances Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993): Manufacturer who made, amongst other things, products which contained asbestos, sought coverage for numerous bodily injury claims brought against it. The court concluded, in part for the public policy benefit of ensuring that injured parties would be more likely to be able to recover damages, that each policy was triggered that provided coverage from the date of exposure of to the asbestos through manifestation of the injury.
- Quincy Mut. Fire Ins. v. Borough of Bellmawr, 799 A.2d 499 (N J. 2002): Policyholder sought coverage for claims of injury resulting from the policyholder’s alleged improper disposal of hazardous waste into a landfill. The court concluded that the policies from initial dumping through manifestation of an injury were all triggered.
Under a “claims made” policy, the above “trigger of coverage” theories do not apply. For the most part, the policy when a claim was first made is the one that is triggered. However, there are situation when multiple claims are arguably related. Most “claims made” policies include a provision that all “related” claims, regardless of the number of claimants or lawsuits, shall be considered one claim. Furthermore, normally, this single claim “relates back” to the first such claim, meaning that the policy at the time of multiple claims would be triggered, even if the later claims are made outside the policy period. An example of such a result is URS Corp. v. Travelers Indem. Co., 501 F. Supp. 2d 968 (E.D. Mich. 2007), where two claims against an architectural and engineering firm for negligent design of two different schools, but for the same client, were deemed to be one “claim” because they are related “regardless of whether the errors were regarding different systems designed by different engineers or whether similar errors were made in two different school buildings that resulted in different quantities of damage for each building.” Another unique trigger situation is where a policyholder switches from an occurrence policy to a “claims made” policy (or vice versa). It is possible, in that situation, for multiple policies to be triggered, even if normally only one policy would be triggered under the relevant trigger theory, because the occurrence policy would be triggered under the controlling theory, while the “claims made” policy is triggered when a claim is filed. A personal example of this situation is a school having “occurrence” policies before switching to “claims made” policies for the equivalent of Employment Practices Liability insurance. A student alleged involvement in a long-term sexual relationship with a teacher at the school and the failure of the school administration to prevent the sexual abuse. The policies in effect during the sexual abuse were occurrence policies and the policyholder alleged was all triggered under New Jersey’s continuous trigger theory. The policy in effect when the claim was made against the school, after the abuse had ended, was a claims made policy. As a result, both the “occurrence” and “claims made” policies were triggered and the question became one of allocation.
ALLOCATION OF COVERAGE
As discussed above, it is potential in different situations for multiple policies to be triggered and coverage to exist under each of them. A policyholder, in calculating and proving its loss, must be prepared to consider how the loss will be allocated over the various policy periods. Courts generally provide two key methods of allocation: pro rata or all sums. Under the pro rata allocation method, each policy triggered is responsible for a portion of damages based on the time it was on the risk in comparison to the total number of years triggered by the loss. New Jersey uses this pro rata allocation. In Owen-Illinois, Inc. v. United Insurance Co., 650 A.2d 1116 (NJ. 1998), New Jersey adopted the pro rata allocation, over a joint and several approach, and applied a “time on the risk” and the degree of risk assumed approach. One warning over New Jersey’s allocation is that, for periods where the policyholder is uninsured, the policyholder is responsible for that pro rata share, but only if the policyholder could have obtained insurance during that period. If insurance was “unavailable”, the policyholder is not liable for the pro rata share. In the context of asbestos claims, policyholders have been contending that no coverage was available for asbestos claims for substantial periods of time, so the policyholders do not owe a pro rata share, while the insurance companies have argued that insurance for asbestos losses was available. Ironically, this position is contradictory to the normal argument by insurance companies that asbestos exclusions should be interpreted broadly because no company was intending to provide insurance after a certain period of time. The “all sums” allocation is an approach where the policyholder effectively can pick any triggered policy and exhaust that policy before moving on to a new policy. This approach is equivalent to a joint and several liability approach and effectively puts the burden on the insurance company to seek contribution from other triggered insurers. See J.H. Frances Refractories Co. v. Allstate Ins. Co., 626 A.2d 502 (Pa. 1993). However, “other insurance” clauses can result in reallocation. See Koppers Co. v. Aetna Cas. & Sur. Co., 98 F.3d 1440 (3d Cir. 1996). One of the primary benefits of the “all sums” approach is to allow the policyholder to minimize the number of deductibles that it will pay for a single occurrence.
Actual or compensatory damages are the money awarded to compensate for a loss. In the context of a first party claim, the actual or compensatory damages would be the amount of money representing the loss suffered by the policyholder and being sought from its insurer. Examples of these types of actual damages are:
- Property damage coverage, such as damage to a building or personal property or loss of use of the property. There are three type of coverages for property damage:
- Replacement Cost – which, as implied, pays the cost of replacing the property regardless of depreciation or appreciation;
- Actual Cash Value – provides for replacement cost minus depreciation;
- Extended Replacement Cost – provides for replacement cost with payment above coverage limit if the costs for construction have increased.
- Business interruption coverage – loss of income as a result of inability to use property;
- Contingent business interruption coverage – loss of income caused by a supplier or customer’s loss;
- Extra expense and contingent extra expense coverage – coverage for the costs in excess of normal business operations resulting from a loss to the policyholder or, for contingent, from a loss to suppliers or customers. Examples could be renting new space or increased transportation costs;
- Civil authority coverage – even if a policyholder doesn’t suffer a loss, the government’s decision that results in lost business may be covered (i.e. during Hurricane Sandy, several towns were ordered to shut down and, even those companies not suffering property damage, may have coverage under civil authority for the lost business);
- Ingress/egress coverage – similar to civil authority, but where damage from a covered event prevents ingress/egress to a policyholder (i.e. a bridge is knocked down that connects the store’s location to its customers); and
- Event cancellation coverage — provides coverage for specified events that are cancelled as a result of factors normally beyond the policyholder’s control.
In contrast to the first party insurance, third party insurance comes in many forms, such as comprehensive general liability, errors and omissions, directors and officers, and employment practice liability, but it provides coverage for a policyholder for claims brought against the policyholder from a third party. Coverage, in this context, often includes both defense costs for defending the claim and indemnity for any liability to a third party. In this context, the actual or compensatory damages are those for which the policyholder is found liable. The policy will likely define the type of damages that are covered. One frequent issue is whether a claim for breach of contract is “property damage” under a CGL policy. In Pennsylvania, the courts have concluded that “property damage” never encompasses breach of contract damages, but other states have applied a more nuanced question concerning the nature of the damages alleged in the breach of contract case. See Willmar Dev., LLC v. Illinois Nat’l Ins. Co., 726 F. Supp. 2d 1280 (D. Or. 2010) (concluding that a breach of contract alleging damages to property that was not part of the original contract is property damage under a CGL policy). A third party recovering punitive damages against a policyholder also raises questions of coverage. States are divided fairly specifically whether punitive damages are generally insurable. In Pennsylvania, an insurer has no duty to indemnify for punitive damages and, generally, a policyholder cannot even obtain specific insurance for punitive damages because it is against public policy to insure such damages. See Aetna Cas. & Sur. Co. v. Roe, 650 A.2d 94 (Pa. Super. Ct. 1994); Aetna Life & Cas. Co. v. McCabe, 556 F. Supp. 1342 (E.D. Pa. 1983); but see 40 Pa. Cons. Stat. § 2051 (2013) (which provides an exception allowing operators of downhill skiing areas to obtain insurance for punitive damages other than those arising from an intentional tort). New Jersey also has a public policy against insuring for punitive damages in the context of product liability claim. See Johnson & Johnson v. Aetna Cas. & Sur. Co., 667 A.2d 1087 (N.J. Super. Ct. App. Div. 1995). However, both Pennsylvania and New Jersey do distinguish punitive damages where the liability is solely vicarious and allow for coverage in some contexts. In comparison, some states conclude that punitive damages are not precluded from coverage as a result of public policy. See First Nat’l Bank v. Fid. & Deposit Co., 389 A.2d 259 (Md. 1978). However, the policy may specifically exclude such coverage and would control, so even if not against public policy most policies will exclude punitive damages. Because of the concerns with punitive damages, policyholders should take this into account when evaluating settlement of an underlying action. A policyholder who presumes that the calculation for a loss includes the punitive damages awarded to a third party may be sorely disappointed.
While every policyholder is upset when denied coverage, bad faith is a remedy available only in exceptional circumstances. Each state has different contexts for what constitutes bad faith, but common potential bad faith examples are:
- denial of coverage without a reasonable basis or a denial of a duty to defend where the underlying action alleges a potential basis for coverage;
- delays in paying policy proceeds;
- where the insurance company defends a case and refuses settlement below policy limits, and a verdict is returned in excess of policy limits; and
- for improper claims handling practices such as misrepresenting policy terms, delaying the investigation, and improperly shifting its basis for denying a claimant’s claim.
Many courts will bifurcate bad faith from the primary claim and, in Pennsylvania, bad faith is not available if there is not coverage, regardless of the insurance company’s actions. Furthermore, Pennsylvania does not provide a right to a jury trial for bad faith. Proposals to amend this law in the Pennsylvania legislature have been made, but, to date, none have passed. In New Jersey, not only is the bad faith bifurcated, but a policyholder must meet a high burden that effectively requires the policyholder to win on summary judgment to even bring a bad faith claim against an insurer for denial of coverage. If you have any questions or would like more information on calculating and proving loss please contact Mr. Pillsbury at: email@example.com | 267.338.1321 Mr. Pillsbury is a principal and member of Offit Kurman’s Insurance Recovery Practice Group. He represents businesses in a wide range of litigation issues, including efforts to recover money owed to them from their insurers. His clients include state transportation agencies, hotels, restaurants, nursing homes, bio-tech firms, school district joint insurance funds, and individuals. You can also connect with Offit Kurman via Facebook, Twitter, Google+, YouTube, and LinkedIn.