NATURAL DISASTER, STORM, WIND AND HAIL
By William Pillsbury, Esquire A common cause of property insurance loss is the natural disaster. It can come in many forms, including snow, rainstorms, high winds, hail, or other extreme weather conditions. Most policyholders will expect and are entitled to coverage for these types of losses under a typical property insurance policy, including homeowners insurance. Despite believing that he or she is entitled to coverage, many policyholders find that insurance companies will fail to provide full coverage or any coverage. In many cases, the failure of the insurance company has led to bad faith claims being brought against them. In this article, some of those areas of denial that lead to bad faith will be discussed. A. Top Bad Faith Claims
- Carpeting – Several issues give rise to bad faith claims related to carpeting. After a loss involving damage to carpeting, policyholders may believe that the right to “replacement’ of the damaged carpeting includes replacing all carpeting. The theory is that you cannot replace only a portion of the carpeting and so “replacement cost” would mean replacing the entirety of the carpeting, including, in extreme cases, a claim for replacement of carpeting in an entire house. See, e.g., Murphy v. Allstate Ins. Co., 83 Cal. App. 3d 38 (1978). Under most policies, a policyholder would not be entitled to coverage beyond replacement of the damaged area, but this has not stopped policyholders from claiming the failure to pay for all carpeting is bad faith. On the other hand, insurance companies can, and have, found themselves liable for bad faith for carpeting damage that occurred < a result of delays caused by the insurance company. In West v. Foremost Insurance Company, No. CIV-06-926-F, 2007 U.S. Dist. LEXIS 94690 (W.D. Ok. Dec. 20, 2007), the policyholder claimed that the insurance company acted in bad faith by not paying for certain remediation, in that case removal of sodden hardwood floors, that resulted in wet rot and molding in carpeting and other items. 2007 U.S. Dist. LEXIS 94690, at *22-23. Both parties agreed that the policy excluded mold damage so this would normally not be covered, but the policyholder sought extra-contractual damages because of the bad faith by the insurance company. Id. The court concluded a genuine issue of material fact existed on these issues and allowed the bad faith claim to be heard by a jury. As this case demonstrates, delays by the insurance company that cause a loss otherwise not covered can provide a basis for bad faith and extra-contractual coverage.
- Asbestos – First party property claims for asbestos are an uncertain area of law. Some jurisdictions have concluded that a building which has asbestos contamination is entitled to first-party coverage “for the release of asbestos fibers and resultant contamination”. See, e.g., Board of Educ. v. International Ins. Co., 720 N.E.2d 622 (111. App. Ct. 1999); Sentinel Mfg. Co. v. Aetna Cas. & Surety Co., 615 N.W.2d 819, 826 (Minn. 2000) (concluding that plaintiffs must show the contamination presented a health hazard and impaired the buildings function). In comparison, other jurisdictions concluded that a loss related to asbestos in a building is “certain to happen” and, therefore, under the fortuity doctrine no coverage is available. Leafland Group II v. Insurance Co. of N. Am., 881 P.2d 26,28 (N.M. 1994). The Third Circuit, in interpreting New Jersey law, concluded that the mere presence of asbestos did not constitute a valid claim, but did not address the question of fortuity or determine that, if asbestos fibers were released and a building was impaired, coverage would exist under a property policy. Port Auth. v. Affiliated FM Ins. Co., 311 F.3d 226, 236 (3d Cir. 2002); see also Motorists Mut. Ins. Co. v. Hardinger, 131 Fed. Appx. 823, 826 (3d Cir. 2005) (finding that the Pennsylvania Supreme Court would likely adopt a similar rule as in Port Authority if presented that issue). In light of this division, in the context of natural disasters, a policyholder with a property containing asbestos that suffers a loss may seek to have coverage for the removal of the asbestos. Both sides can cite to law and this uncertainty leads to claims of bad faith when the insurance company denies coverage. In addition to the direct first party claim, the type of coverage may also play an important role. Some policies include “code upgrade” value for replacement. In the “code upgrade” context, the insurance company would likely owe the costs related to removal of asbestos because current codes are most likely going to require asbestos to not be in a building. Under this policy, bad faith would likely be found to exist if the insurance company refused payment based on an exclusion or an argument that asbestos was not covered.
- Mold – Most first party property policies include some form of mold exclusion, including many which include an anti-concurrent causation provision. As such, for most policyholders, mold damage is not covered. However, as discussed above, even if mold is not covered directly, delays or other actions (or inactions) by the insurance company that lead to mold damage that otherwise would not be covered, may be recoverable as an extra-contractual claim under bad faith rales. See West 2007 U.S. Dist. LEXIS 94690, at *22-23. In the context of natural disasters, water intrusion is often the end result of storm, wind, or snow damage. Timely remediation is important and insurance companies that utilize a delay tactic, either by refusing to pay for remediation efforts, stonewall certain efforts in order to “investigate”, or otherwise put up roadblocks, can find themselves facing extra-contractual damages in the form of cleaning up mold.
- Painting – As with asbestos, removing and replacing lead based paint is a frequent issue that comes up after a natural disaster loss. In Pirie v. Federal Insurance Company, 696 N.E.2d 553 (Mass. App. Ct. 1998), the Massachusetts Court of Appeals concluded that lead paint was the equivalent of an “inherent defect” in a building and, therefore, eliminating lead paint from a house was not a covered loss. 696 N.E.2d at 908. In Yale University v. CIGNA Insurance Company, 224 F. Supp. 2d 402 (D. Conn. 2002), the United States District Court for the District of Connecticut distinguished Pirie by noting that there is a difference between simply a house containing lead paint and the diminution in value of the house because of that lead paint and a house being unusable because of lead paint chips infesting the house. 224 F. Supp. 2d at 413. As these cases highlight, the determination of whether an insurance company owes a duty to pay for elimination and removal of lead paint could turn on whether or not the storm caused chipping.
- Repair of Walls and Insulation – Many policies now include exclusions for damage related to Exterior Insulation and Finish Systems (EIFS), i.e. synthetic stucco. These exclusions stem from the growing evidence that EIFS deteriorate and expose homes or other buildings to moisture infiltration and, as a result, mold or similar conditions. An example of this type of exclusion is:
This insurance does not apply to property damage actually or allegedly resulting from, arising out of, or in any way related to the application or manufacture of any exterior insulation finish system (“EIFS”), or any product that is a component of an EIFS system. In the context of natural disasters to property with EIFS, it is highly likely that some of the damage will be through the EIFS. Insurance companies that deny coverage, in essence, contending that the application of the EIFS led to the damage will likely end up in a battle of causation and, if it is found to lack a reasonable belief that the loss arose out of or related to the application of the EIFS, a bad faith claim is likely to follow.
- Loss of Power – A common occurrence following a storm of any sort is loss of power. Loss of power can lead to the loss of personal property, for example food in a refrigerator and freezer, as well as constituting a loss of use of the property. In Somerset Industries, Inc. v. Lexington Insurance Company, 639 F. Supp. 2d 532 (E.D. Pa. 2009), a property suffered significant damage, including the loss of power, as a result of water intrusion from a storm. 639 F. Supp. 2d at 534. Lexington Insurance Company denied a claim for business interruption asserting that the loss of power and loss of inventory as a result did not constitute a “necessary suspension” as required to obtain business interruption coverage. Id. at 542. The court concluded that the evidence presented by the building owner that the loss of power and inventory did result in a “necessary suspension” created a genuine issue of material fact and was an issue for the finder of fact. Id. In the Somerset case, the court denied the bad faith claim, but it was predominantly because of the failure of the policyholder to cooperate in the investigation. Id. at 544. This example demonstrates that “loss of power” resulting from a covered loss can lead to numerous consequential damages that an insurance company may seek to avoid, but a failure to provide coverage for those can lead to a bad faith claim.
- Additional Living Expenses – many homeowner policies include a “loss of use” provision that requires the insurance company to cover the rental costs for an equivalent home to live in while repairs are ongoing. An insurance company that asserts a home is still “usable” may face a bad faith claim if the policyholder can demonstrate the home is unusable. Examples of this type of dispute occur when loss of power makes an otherwise fairly intact home unusable due to extreme temperatures or a home undergoing significant repairs is livable but for repair work interfering with air quality. In those type of disputes, a policyholder who is paying his or her own cost of rental will likely seek coverage as well as claim bad faith for the insurance company requiring that the policyholder pay the rental costs.
B. Top Risks Excluded By Insurance Companies As discussed above, the top risks stemming from natural disasters, especially water natural disasters, include mold and EIFS. In addition, and related to mold, most policies distinguish mold from fungus and dry rot, which are often also specifically excluded. Policies will also have pollution and/or contamination exclusions, which can include such losses as carbon monoxide from a bad furnace. Many policies also exclude some form of flooding, including distinguishing between sewage backup, storm surge, and flooding as a result of rain. Finally, inherent risks in a home, such as asbestos and lead-based paint – both discussed above, will likely be denied as covered for a variety of reasons. C. Gathering Evidence The gathering of evidence is something important for both the policyholder and insurance company. In a natural disaster case, contemporary photographs or videotaping will be important to show the state of a property soon after a loss. In addition, the policyholder should document all remediation efforts and home repairs, especially if undertaking them prior to the insurance company sending out inspectors (which should generally be avoided, but some remediation is essential to avoid more significant losses). For a policyholder, there are numerous experts who can assist in these efforts, including public adjustors, contractors, and attorneys. Nonetheless, it is important for the policyholder to be able to document all steps taken and to maintain photographs. Finally, the policyholder should be sure to gather his or her own evidence and not rely solely on the investigators sent by the insurance company. A policyholder must be prepared to refute any misstatements by an investigator with evidence. For the insurance company, it has an obligation to perform a timely investigation to determine the cause of loss and whether coverage exists. Insurance companies will likely have contacts with various inspectors, investigators, contractors, etc. who can be available quickly to inspect properties. Delaying in the gathering of evidence not only exposes the insurance company to claims of bad faith, but also risks the insurance company being without necessary information to make a full claims analysis or, if the delay results in additional damages, exposure to extra-contractual damages. With these general principals in mind, here are some general principals for gathering evidence (some apply exclusively to the policyholder): Provide Notice – The most important thing to remember is to provide notice of any loss or potential loss to your insurance company. Failure to provide timely notice can result in the loss of coverage, so it is very important to notice all insurance companies whose coverage is potentially triggered. For some companies, there may be only one insurance company providing coverage, but many companies end up with different coverages from different insurance companies or may have umbrella or excess policies. Because of the importance of notice to all insurance companies, notice should be provided in the initial stages of the investigation. It is much better to inform an insurance company that a claim is not being pursued than it is to be denied coverage because of failure to provide notice. 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 common to insurance coverage disputes. These people can be limited to company personnel or can include outside consultants. Depending on the loss, outside consultants can include lawyers, accountants, loss adjusters, insurance brokers, environmental consultants, insurance archaeologists, and others. Importantly, while the team should and will be expanded depending on the nature of the claim involved, both the policyholder and insurance company should have some of the team set up in place for case intakes. Record Your Investigation – Both the insurance company and policyholder will inevitably perform some investigation of the loss. The investigation can be anything from taking photos on a phone to hiring engineers to inspect physical damage. During all phases of these investigations, it is important to keep records of the results of the investigation. Being able to document the claim and loss will be a key component of reaching a successful conclusion to the dispute. Keep the Other Side Up To Speed – Even if the other party appears to be indifferent or dithering, it is important to keep them up to speed with what you are doing. In addition, these updates should be written. For the policyholder, insurance policies typically include a “duty to cooperate” provision, which requires that the policyholder cooperate with the insurance company’s investigation and evaluation of the claim. While it can be very frustrating to respond to an insurance company’s repeated requests for documentation and other information, the policyholder must satisfy its cooperation responsibilities and it is helpful to preempt the requests of the insurance company. For the insurance company, most states, including Pennsylvania, have requirements for performing a timely investigation and notifying policyholders of the investigation. It is not sufficient for an insurance company to abandon an investigation at the first sign of a policyholder being problematic. It is also good to remember that the policyholder has undergone a major loss and be sympathetic to the policyholder who is struggling with the many issues stemming from that loss. Do Not Rely Exclusively on the Other Side’s Investigation – For the policyholder, even if the insurance company appears to be accepting coverage and sending out experts to evaluate a claim, a policyholder would be mindful to perform their own investigation. Even if a policyholder lacks resources to perform as complete an investigation as an insurance company, the company should be sure to perform some investigation and be prepared to respond if the insurance company makes any misrepresentations. Often an investigator for an insurance company will not be as familiar with the nature of a business and can end up misrepresenting because of a misunderstanding and it will be important for the policyholder to be able to respond quickly and effectively to any misrepresentations. Similarly, an insurance company should send out its own people and not simply rely on the material being provided by the policyholder. Keep Track of Your Investigation Costs – Not all policies provide coverage for an investigation, but many do. As such, it is important to keep track of the costs that stem directly from the loss and keep track of those costs as part of your insurance claim. D. Finding Policy Discrepancies 1. Multiple Storms, Multiple Deductibles and Multiple Limits? One of the most difficult issues that can arise is when a property is damaged by subsequent storms. In 2004, the east coast of Florida was hit by three hurricanes within a period of six weeks. Each storm caused significant damage and one of the issues facing policyholders and insurance companies was the question of by how many occurrences was a property damaged. Ironically, the answer by each side often depended on the amount of the loss. For a property that suffered some, but not catastrophic damage, the insurance company benefitted from three deductibles and made such a claim. For a property that suffered catastrophic damage that exceeded a single limit, treating the storms as multiple occurrences was more beneficial, but the insurance company benefitted from claiming only one occurrence. For example, at least one hotel in the Daytona Beach area suffered roof damage during the first of the hurricanes, but was able to rent out lower rooms prior to the later storms. The second storm destroyed the remediation efforts and damaged additional rooms, but only after the third storm was the property effectively put out of business. The hotel suffered a total loss and sought damages in excess of a single per-occurrence limit and, therefore, argued that each storm caused significant damage and sought in excess of the per-occurrence limit. On the other hand, the insurance company argued that it was one occurrence and the damage should be limited to a single per-occurrence limit. On the flip side, another hotel suffered a similar situation, but the property was part of a large policy involving numerous properties and the high deductible with a per-occurrence limit well above the value of the property meant the same insurance company argued that this property suffered three separate occurrences and three deductibles applied. Despite its apparent conflicting position, the insurance company conceded that, based on the definition of occurrence in the policy, each storm was a separate occurrence, but argued, in the first case, that the first storm destroyed the property so no additional damages could have been suffered in the latter storms. This example demonstrates that, under most policies, separate storms are separate occurrences. The challenge is more in determining what caused a loss. With storms occurring in quick succession and ending in catastrophic loss, it will be difficult to show whether the initial ice storm that caused a roof collapse or the later blizzard that ripped off the temporary roof and dumped two feet of snow into the building was the occurrence that caused the loss. The best approach is to, as discussed above, attempt to document losses quickly and thoroughly. And, for insurance companies to avoid claims of bad faith, the insurance company should avoid scenarios where it take advantageous, but contradictory positions. Most attorneys will be quick to use these different positions and a jury deciding bad faith will certainly question the motives of an insurance company that takes contradictory positions. 2. Collection on Two Risks Under One Policy: Excluded vs. Covered Risks The question of whether a party can collect on two risks will likely turn on a few policy provisions and whether the damage from the risks are separate or linked. In the case of clear distinction in loss, only the loss from a covered risk would be covered. However, this situation is rare. The far more common event is that a property suffers loss from multiple risks that include some covered and some excluded risks. One policy language that is especially problematic for coverage is the anti-concurrent causation language. A typical “anti-concurrent” clause reads something like this: “We do not insure for such loss regardless of: a) the cause of the excluded event; or b) other causes of the loss; or c) whether other causes acted concurrently or in any sequence with the excluded event to produce the loss.” Some courts in Pennsylvania, along with many other jurisdictions, have found this language unambiguous and concludes that, if an excluded risk causes a loss, even concurrently with a covered risk, the policyholder is not entitled to coverage. See T.H.E. Ins. Co. v. Charles Boyers Children’s Trust, 455 F. Supp. 2d 284, 292-94 (M.D. Pa. 2006). Some policies have concurrent causation clauses related to specific exclusions that will provide coverage for concurrent losses, but carve out certain losses. For example, many mold exclusions have some form of causation language which will make losses related to mold, especially mold remediation, an uncovered loss, even if coverage is generally available for the more substantial loss to the property. If no such language exists, Pennsylvania, and many other states, use a proximate efficient causation analysis. “In essence, the efficient proximate cause rule states that a loss is covered under the insurance policy when the loss is caused by a covered peril, even though other excluded perils contributed to the loss.” Tatalovich v. Pennsylvania Nat’1 Mut. Cas. Ins. Co., No. 10724 of 2001, 2003 Pa. Dist. & Cnty. Dec. LEXIS 239, at *1 (Pa. Ct. Com. Pl. Beaver Cty. Oct. 10, 2003). Under this doctrine, coverage is available if the proximate cause of the loss is a covered loss. An example of this interplay would be the Somerset Industries case. In that case, damage was caused by a heavy storm, including water coming in through a garage door and water backing up in the sewer pipeline and flooding the lower levels. 639 F. Supp. 2d at 534-35. The policy in that case had a concurrent causation clause related to the sewer backup flooding and Lexington Insurance Company denied coverage. However, under the efficient proximate cause doctrine coverage would most likely exist, since even the sewer pipeline backup was caused by the initial storm, a covered risk. As such, the determination of whether a party can collect on an excluded and covered risk will come down to the language or absence of language in a policy and a proximate causation analysis, if necessary. E. Common Property Losses Included in Natural Disaster Policies Most property insurance policies are “all-risk” policies that contain exclusions. As such, it is far more common for policies to default to covering any natural disasters and then determining what is specifically excluded, as discussed above. For example, on one insurance company website, it lists as covered claims under its standard homeowner policy: earthquake, hail, hurricane, tornado, and wildfire. However, in many regions (those most prone to those type of losses), exclusions for those specific losses may exist. For example, most property policies sold on the GulfCoast don’t include flood damage and some policies in California exclude earthquakes. Policyholders can often purchase these types of coverages for additional premium. F. Proving Roof Replacement vs. Roof Repair In the context of natural disasters, the question of whether a roof needs to be replaced or simply repaired can be a significant financial dispute. Policyholders will often contend a new roof is necessary, especially if the repair material seems inferior or somehow not consistent with the old roof. In Enwereji v. State Farm Fire & Casualty Company, No. 10-cv-4967, 2011 U.S. Dist. LEXIS 83417 (E.D. Pa. July 28, 2011), a homeowner sought the cost to replace a roof because the “slate shingles currently on the market are [not] sufficiently similar to those on Plaintiffs roof to restore them to pre-loss condition.” 2011 U.S. Dist. LEXIS 83417, at *8-9. The court concluded that such an argument is equivalent to a windfall for the policyholder and, because the policy only requires repair of the “damaged part”, the insurance company was only obligated to pay for repair of the portion of the roof damaged. Id. at * 15-16. Pursuant to Enwereji and other cases with similar outcomes, a policyholder will only be entitled to recover for the portions of the roof that are damaged, absent a showing that the roof must be replaced entirely. As such, the policyholder must approach a claim for roof replacement with a recognition that the burden is on them to show that the damage is so extensive as to require replacement. In making such an assertion, the policyholder will likely need qualified experts, such as contractors and appraisers, and documentary support of the condition of the roof. In addition, the policyholder must allow the insurance company to inspect and not attempt to “trap” the insurance company by repairing and then submitting the bills, which will likely result in a denial of the claim for failure to cooperate. G. Critical Strategies and Tactics Needed to Settle With the Insurance Company This section will focus on how policyholders can best settle an existing claim with an insurance company. This advice applies to both bad faith claims and claims in which bad faith is not raised. However, it is important for a policyholder to consider the impact of asserting bad faith. Insurance companies may feel pressured by a bad faith assertion, but equally may feel the need to prove that bad faith did not exist. If a policyholder wants to use bad faith as an effective leverage, the policyholder should be able to document real examples of bad faith and not just simply contend the insurance company disagreed with the policyholder’s interpretation of policy language. With that in mind, here are some basic strategies that will help reach settlement with insurance companies: Control the Lawyers (and Other Non-Principals) – Allowing outside attorneys, including the insurance company lawyers, to become tangled in unproductive arguments only serves to slow down or entirely halt the progress of the negotiations and delay resolution. It is important to remember that, as mentioned above, the insurance company and its lawyers have an interest in delaying settlement. Therefore, while your team can provide advice behind the scenes, keep the business people involved in all aspects, and try to maintain a principal-to-principal line of communication. Avoid Open-Ended “Standstill Agreements” – Parties sometimes agree to delay or suspend litigation to allow time for settlement negotiations. While a “standstill agreement” can be a useful tool to resolve a claim and control litigation expenses, it is important to realize, however, that a standstill can reduce the policyholder’s settlement leverage. A standstill must have a clearly defined deadline that provides a realistic period for the policyholder to provide necessary information, for the insurance company to review the information and respond, and for negotiations to proceed. Any period longer than reasonably necessary to complete this process simply results in more time that the policyholder does not get paid. Be Prepared, Cooperative, and Persistent – Prepare thoroughly. A good starting point is to collect and organize some basic information, such as all potentially applicable insurance policies and related documents, and evidence of all relevant costs and expenses. Having this information in hand helps to realistically understand and evaluate the value of the claim, and means you have the proof necessary to substantiate the claim. Do not give the insurance company a reason to not pay your claim. Promptly respond to the insurance company’s reasonable requests for information, ask for clarification if you do not understand a request, follow-up on requests to which the insurance company has not responded, document all of your communications with the insurance company, maintain a professional and courteous demeanor, and be persistent. The last letter should be from the policyholder. Try to Accommodate Reinsurance Companies — Insurance companies are often concerned about whether their reinsurance companies will cover amounts that they pay a policyholder. Whenever possible, honor requests that assist your insurance companies in getting reimbursed from their reinsurance companies. Being cooperative in this respect maximizes the amount of money that you may be able to recover. Calculate Each Insurance Company’s Exposure – When a large claim involves multiple insurance companies, as most do, each insurance company’s exposure should be calculated separately. For “long-tail claims,” e.g., those involving multiple years of coverage such as environmental and asbestos claims, the calculation methods can be infinite. Evaluate each insurance company’s potential liability. Negotiate With One Company at a Time – Generally, negotiations that bring all of the insurance companies together at the same time may not result in prompt settlements. Because the issues in these negotiations are numerous and complex, settlements often take place separately with each insurance company. There are certainly exceptions to this rule, particularly where the claim involves a single year of coverage. Properly Document Settlement – As you progress through negotiations and near a resolution to the claim, make sure that you consider a few additional issues and properly document the settlement:
- Focus on the Scope of the Release
- Beware of Indemnification Provisions
- Examine Allocation Issues
- Do Not Bind Future Acquisitions
While each policyholder’s claim is unique, it is important to be mindful of some general issues that can be helpful when facing a dispute with your insurance company. Above all else, obtain and organize the facts, evaluate the strength and value of the claim, develop and pursue a strategy, and don’t give up. If you have any questions or would like more information on insurance claims due to natural disasters, storms, wind and hail please contact Mr. Pillsbury at: firstname.lastname@example.org | 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.