Property Insurance Coverage Law Blog

Deciphering the Homeowner's Insurance Policy in California

Denise Sze — Wed, 16 May 2012 08:34:56 -0500

The most frequent questions asked by clients when they initially consult with my offices is, "Does my policy cover this loss? or Does my policy provide for__?" The answer almost exclusively is, "let’s look at your policy." It’s usually at this point that an insured may tell me that the insured has never read the policy, or attempted to read the policy after its initial receipt but gave up because it was so confusing. Although I have been reading and deciphering policies for quite a while, I cannot disagree with any insured when they tell me the language of the policy is muddled or nonsensical. However, despite being a poor read, looking at the policy is absolutely necessary to see if a loss is covered.

In California, as with other states, there are many exclusions added onto a general homeowner’s policy, and losses caused by floods, earthquakes, termites, insects, rats or mice, water seepage, mold, wear and tear, etc., may not be covered unless additional coverage is purchased by the insured.

Generally, homeowner’s policies should all read about the same. It is my intention to provide a roadmap for insureds on how to read their policy and what sections to look for to see if specifics are covered. In most instances, a general homeowner’s policy should provide coverage for property coverage and liability coverage.

When looking at a policy, Section 1 contains the specifics for property coverages (A,B,C and D) and Section 2 provides the liability coverages (E and F):

Coverage A provides information regarding the primary dwelling’s covered losses;
Coverage B provides coverage regarding other structures (such as detached garages, sheds, barns, etc. on the property. Coverage B is usually limited to 10% of the Coverage A limit, however additional coverage may be purchased;
Coverage C provides coverage for the contents of your home. This includes costs to replace, or restore items in the home that are damaged by a loss. Although Coverage C for contents may replace clothing, furniture, etc., special coverage may also be purchased for specialty items which are more likely to be targets of a theft and have limited coverage such as jewelry, artwork, cash, etc. Like in Coverage B, more monetary coverage for Coverage C may be purchased at an additional premium agreed on with the insurer;
Coverage D is specialty coverage for loss of use. This type of coverage may or may not be written into your homeowner’s policy, depending on the policy. Coverage D provides for loss of use when an insured is displaced after a loss and may cover costs for rentals, or hotels, meals and storage;
Coverage E provides personal liability coverage when the insured may become legally responsibly for injury to others that come onto the property. Coverage E provides a legal defense and will pay for damages. Coverage E does not kick in for intentional acts by the insured and sometimes in places that are considered high risk or crime areas may be excluded from the policy altogether;
Coverage F provides coverage for medical payments for third persons accidentally injured on the insured’s property.

If in doubt about what coverage your homeowner’s insurance policy provides, remember to ask. Knowing what type of policy purchased prevents an insured from being unprepared in the event of a loss.

Third Party Beneficiary Status Under a Force-Placed in Texas

Sergio Leal — Tue, 15 May 2012 18:18:25 -0500

Banks and mortgage companies regularly buy what is known in the insurance world as “force-placed” insurance coverage. This type of coverage protects a mortgagee’s interest in the property should no other insurance coverage apply. In other words, force-placed insurance ensures that a property is covered, regardless of the circumstances. Most force-placed policies are made between the bank/mortgage company and the insurer. So what rights, if any, does a borrower have under such a policy?

The Texas Court of Appeals for the First District in Houston dealt with this very issue in Alvardo v. Lexington Insurance Company. In Alvarado, Mr. Alvarado refinanced his mortgage, but in order to refinance, he was required to drop his homeowners insurance policy with Columbia Lloyds, and was told by Flagstar Bank, his mortgagee, that it would acquire insurance coverage for the property. Flagstar obtained a force-placed insurance policy through Lexington Insurance Company, and a portion of Mr. Alvarado’s monthly mortgage payment went to pay for that insurance.

Mr. Alvarado’s property was damaged by Hurricane Ike in 2008 while the “forced-placed” policy was in effect. Lexington made an insurance payment for the damage to Flagstar, and Mr. Alvarado was never given any of those proceeds to repair the property. Mr. Alvarado then attempted to recover insurance proceeds to repair his home, but Lexington told him that because he was not listed as an insured under the forced-placed policy, he had no rights under the policy and they would not be issuing any payment to him. Mr. Alvardo then sued Lexington under a third-party beneficiary theory. The trial court granted summary judgment in favor of Lexington, and Mr. Alvarado appealed.

On April 19, 2012, the Texas Court of Appeals rendered its decision. The Court noted that,

Although Texas state courts have addressed whether a party may be a third-party beneficiary in the general insurance policy context, they have not addressed the specific issue of whether a homeowner-borrower qualifies as a third-party beneficiary under a force-placed insurance policy entered into between the insurance company and the mortgage company.

Because there was no guidance at the state court level, the Texas Court of Appeals turned to federal case law for guidance.

The federal courts applying state law, like Texas courts, have looked to the language of the policy to determine whether any of the provisions clearly confer a benefit upon the borrower.

The Court noted two examples where the Fifth Circuit found third-party beneficiary status: (1) when the policy, although only listing the mortgage company as a named-insured, contains subrogation clause providing that the homeowner-borrower will not be liable to the insurance company for any loss paid to the insured; and (2) when the policy contains a provision allowing for temporary housing expenses to be paid to the homeowner-borrower.

Primarily, the federal district courts have focused on whether the policy contains one of two specific clauses that may benefit the borrower: an ‘excess loss’ or ‘residual payment’ clause or (2) a clause providing that the insurer will adjust all personal property losses with, and pay any such proceeds to, the borrower.

The Court concluded that this question is very fact-specific. The Court of Appeals, by a split 2-1 decision, ruled that the specific set of facts in Alvarado did not merit summary judgment for Lexington, and reversed the lower court’s decision.

What Are The Parties To Do When There Is A Breakdown In The Appraisal Process?

Shaun Marker — Mon, 14 May 2012 08:20:51 -0500

This was an issue recently in a Florida case from the Second District Court of Appeal, Jyurovat v. Universal Property & Casualty Ins. Co., No. 2D11–712 (Fla. 2d DCA April 13, 2012). The Court stated “[t]he insurance policy does not address a breakdown in the appraisal process.” The policyholder’s appraiser had fired the neutral umpire from the appraisal process, apparently being dissatisfied with the pace of the umpire’s efforts.

The claim stemmed from a fire loss in January 2008. The insured and the insurer could not agree on a settlement, so the insured demanded appraisal. The parties appointed their appraisers and selected a neutral umpire, who inspected the property. The insured’s appraiser became dissatisfied with the lack of conclusion to the process despite repeated suggestions by the umpire that he would be issuing his award shortly. After the matter had been in appraisal for about seven months, the insured’s appraiser fired the neutral umpire. Universal’s appraiser did not agree to the firing.

The insured sued Universal, seeking declaratory relief on whether the structure was a total loss, whether Universal could withhold overhead and profit, whether the dismissal of the umpire was proper, whether the loss payable under the ordinance or law provision was ripe for appraisal, and damages. Count II of the Complaint sought the appointment of a new umpire.

As an affirmative defense, Universal asserted that the insured obstructed and failed to complete the appraisal process by terminating the umpire without just cause. Universal also counterclaimed for breach of contract. The insured denied terminating the umpire without just cause. He argued that he tried to comply with the appraisal provision but that, after he moved to replace the umpire, Universal raised coverage issues not subject to appraisal. The insured filed an amended complaint seeking damages for breach of contract.

After some discovery in the case, the trial court granted summary judgment for Universal, ruling that the insured breached the policy by unilaterally terminating the umpire and failing to complete the appraisal before filing suit. The insured appealed that adverse ruling.

The Second District Court of Appeal stated that the insured cooperated in the appraisal process from May 2008 until December 2008 and noted that he did not end the appraisal process; he just wanted a new umpire. The Court held that the whether the insured willfully and materially breached the policy by firing the umpire was a question to be decided by a jury, and reversed the trial court’s summary judgment for Universal:

The sole basis for the summary judgment was the purported termination of the umpire and the filing of a declaratory judgment action. The issue of whether this constituted a material breach, if at all, of the policy is a question for resolution by the fact finder. Summary judgment was improper. [emphasis added]

The Court noted that if the insured’s appraiser was dissatisfied with the pace of the umpire’s efforts, the law provides alternatives to unilaterally firing the umpire. The Court cited cases where various emergency motions seeking to replace the umpires had been filed.

Carrier's Reliance on CPA's Report to Support Business Income Loss Calculation is Not Sufficient to Defeat Bad-Faith Allegation - Understanding Business Interruption Claims

Michelle Claverol — Sun, 13 May 2012 11:47:51 -0500

A federal court in California recently denied AMCO’s request to enter judgment in its favor and dismiss a policyholder’s allegations of bad-faith in the handling of a business income loss claim. In A-1 Transmission Automotive Technology, Inc. v. AMCO Insurance Company, No. 10-8496, 2012 WL 1534466 (C.D.Cal., April 27, 2012), the Plaintiff’s auto garage location sustained a substantial. AMCO commenced a claim investigation a $25,000 advance to compensate for business personal property. The garage owners commenced emergency shoring and repairs required by authorities to allow entry to the red-tagged building and to provide temporary power.

Ten (10) days after the loss, the President of the Company gave a recorded statement and informed AMCO that the business grossed approximately $1 million annually. AMCO advanced $50,000 under the Business Income coverage and obtained an agreed scope of repair. AMCO retained the services of a CPA to evaluate the merits of the business income claim. AMCO requested various financial documents that could support Plaintiff's Business Income claim.

Ten (10) months after the loss, the garage owners submitted a formal business income loss claim requesting an additional $143,099.94 for the loss of income sustained over a six-month period of time. The owners also requested $120,378.84 in Extra Expenses which included $68,000 incurred in additional security for the premises. AMCO renewed its request for financial documents including Plaintiff's general ledgers for 2007 and 2008.

Over the course of a year, the Parties exchanged multiple e-mails and letters, in which Plaintiff sent certain documents to Defendant, and Defendant asked for more documents. AMCO then sent a letter to Plaintiff stating that it did not have sufficient documentation to accurately determine Business Income loss and as a result, it could only estimate the Business Income loss at $29,181.

The garage owners hired an attorney and a CPA who concluded that Plaintiff's Business Income loss was $373,462, in addition to the $120,378.84 in Extra Expenses.

California law recognizes in every contract, including insurance policies, an implied covenant of good faith and fair dealing, which means that the insurer should refrain from injuring its insured's right to receive the benefits of the insurance agreement. In order to state a claim for bad faith, a plaintiff has the burden of showing that (1) the insurer withheld policy benefits, and (2) the delay or denial was unreasonable and without proper cause. Love v. Fire Ins. Exch., 221 Cal.App.3d 1136, 271 Cal.Rptr. 246 (1990).

In general, a court may grant summary judgment on bad faith claims where it is undisputed that the basis for the insurer's decision was reasonable, but if there is a question as to whether the insurer acted unreasonably, the court will let the jury determine the reasonableness of the insurer’s conduct.

In this case, AMCO argued that as a matter of law, it cannot be liable for bad faith if it reasonably relied on an expert's opinion to calculate the $29,181 in Business Income loss.

In denying AMCO’s summary judgment, the court stated:

Defendant's reliance on its CPA's opinion does not automatically insulate Defendant from bad faith liability. Reliance on an unreasonable expert opinion or failure to conduct a thorough investigation can still subject an insurance company to liability. Guebara v. Allstate Ins. Co., 237 F.3d 987, 995.

[…] Plaintiff originally estimated Business Income loss at $243,099.94, and now, through an expert, has calculated this income loss at $373,462 (with supporting documents). The Court finds that, at this stage, it cannot determine which of these business income loss calculations was correct, let alone whether Defendant had a reasonable basis for choosing the significantly lower estimate.

The case for the garage owners is certainly not over, but they will have an opportunity to present evidence before the jury and obtain an determination on whether AMCO acted unreasonably and in the adjustment of this claim.

Contents Inventory Smart Phone App and Documenting Your Personal Property, Part II

Nicole Vinson — Sat, 12 May 2012 09:20:14 -0500

Last week's post featured the new smart phone app that helps insureds quickly capture information needed to document their personal property before a loss. This week, I have written about the organization that created the app -- The National Association of Insurance Commissioners -- and their recent connection with United Policyholders.

Started in 1871, the NAIC is a voluntary organization whose members are the chief insurance regulatory officials of the 50 states, the District of Columbia and the five U.S. territories. The organization exists to coordinate regulation of multistate insurers: “The NAIC's overriding objective is to assist state insurance regulators in protecting consumers and helping maintain the financial stability of the insurance industry by offering financial, actuarial, legal, computer, research, market conduct and economic expertise.”

According to the mission statement, the number one objective of the NAIC is to protect the public interest.

Beside the contents inventory application, the NAIC has other resources and website forms that can assist policyholders. The NAIC created the Insure U education program. Available in English and Spanish, Insure U provides insurance information specifically for consumers relating to life, health, home and business coverage. Visit www.insureUonline.org to learn more.

The NAIC webpage is a helpful resource for policyholders nationwide who would like to file a complaint against their insurance carriers. The large interaction map of the US provides shortcuts for each state’s insurance complaint department. Click on the picture of your state and file the complaint.

Of course, when you click on the Florida link, you are directed to a confusing page that does not mention the word “complaint.” After creating an account and clicking on more links, one can finally file their “Request for Insurance Assistance.” This is the code name for a complaint in Florida. Check out my prior post regarding how Florida hides its consumer complaint forms: Does Burying the Complaint Form Deter Policyholders From Filing Consumer Complaints Against Insurance Companies? Other states like Illinois and New York seem to be candid about the ability to file an insurance company complaint. In fact, New Yorkers need only fill out a quick online form to get an instant email confirmation and file number. Illinois’s page has a great title, “I want to file an insurance complaint”.

Why is Florida so secretive about the complaint form? This might be a good question to ask the NAIC president, Kevin M. McCarty, who is also the Commissioner of the Florida Office of Insurance Regulation. Florida’s Chief Financial Officer, Jeff Atwater is also a member of the NAIC.

While the NAIC members include insurance regulatory officials from around the country, the NAIC also recently welcomed someone we know is on a mission for policyholders, Amy Bach. Amy is the executive director of United Policyholders and this will be her first term on the NAIC Consumer Participation Board of Trustees. The UP website explains their goals for the NAIC:

Simplifying policies to make them understandable to consumers
Reversing the trend of “exclusions gone wild”
Making it possible for consumers to comparison shop for quality and price
Advocating for all states to enact post-disaster regulations to address the problems of underinsurance and insufficient ALE benefits

United Policyholders (UP) is a non-profit organization that is a voice and an information resource for insurance consumers in all 50 states. Funded only by donations from individuals and businesses, UP does not accept funding from insurance companies. UP also provides a great resource for policyholders who have suffered a loss. In addition to the smart phone contents inventory, insureds should also check out the Disaster Recovery Handbook & Household Inventory Guide, the handbook Amy Bach and Carol Ingalls Custodio published..

At the time of publication, this was ”the first-ever guide to preparing for and recovering from a natural disaster written by survivors for survivors, along with expert advice from trusted consumer advocates and personal finance professionals."

The book includes:

First steps and sources of help on the road to disaster recovery
Advice on using tax rules specially designed for loss victims
Step-by-step guidelines for optimizing insurance claim recovery
Tips for reconstructing the contents of a destroyed home, including detailed lists of items commonly found in households
How to find the right professional help
Tips and information important for emergency preparedness

This is a valuable resource for public adjusters and policyholders. To order you copy call 1-888-894-8621 or click here to order online.

Not all Experts are Created Equal

Kevin Healey — Fri, 11 May 2012 06:43:15 -0500

Claims between policyholders and their insurance companies can seem simple. I often hear, “My roof didn’t leak prior to the storm and now it does. How can the insurance company say it wasn’t a result of the storm?” Generally, when this is the case, the insurance company has hired an expert to opine about what actually caused the leak. More often than not, that expert, who is being paid by the insurance company not only on this case but on many others, determines that the leak was caused by wear and tear instead of the storm. Interesting, but how do we know that the expert is qualified to render such an opinion?

Under Rule 702 of the Federal Rules of Evidence, specific and relevant knowledge, skill, experience, training, or education is required to qualify an expert witness. There are no degree or certification requirements and no years of service or publication requirements. Courts have allowed experts with no formal education but years of experience and “academics with no practical experience” to offer opinions. (See Eagle Pet Serv. Co. v. Pacific Employers Ins. Co., 175 A.D. 2d 471, 572 N.Y.S. 2d 625 (N.Y.A.D. 3 Dept., 1991); Lavespere v. Niagara Mach. & Tool Works, 910 F.2d 167 (5th Cir. 1990)). Sometimes the qualifications of an expert will be called into question, and other times the dispute will be over the reliability of the expert’s principles and methods.

The test used to determine an expert’s reliability in federal court is known as the Daubert test. This test includes:

A witness who is qualified as an expert by knowledge, skill, experience, training, or education may testify in the form of an opinion or otherwise if:

(a) the expert’s scientific, technical, or other specialized knowledge will help the trier of fact to understand the evidence or to determine a fact in issue;

(b) the testimony is based on sufficient facts or data;

(c) the testimony is the product of reliable principles and methods; and

(d) the expert has reliably applied the principles and methods to the facts of the case.

However, this list is non-exhaustive, and judges have great leeway in determining whether a person is qualified to give expert testimony. An expert who has 14 advanced degrees in general automotives might be just as qualified as an person who dropped out of high school but has worked 25 years as a general auto-mechanic.

Keep in mind that the Daubert test is not used in all state jurisdictions. Academics matter, but so does experience.

The National Spotlight Is Focused on a Florida Sinkhole: Check Your Policy and Verify That You Are Covered

Larry Bache — Thu, 10 May 2012 06:33:19 -0500

On May 3, 2012, homeowner Lou Lambro woke to discover this one hundred feet wide and fifty feet deep sinkhole forming in his yard.

According to local news outlets, Mr. Lambro had sinkhole insurance and his property has been labeled as a total loss. The entire nation followed this story, reminding policyholders of the importance of sinkhole coverage. Florida has a great propensity for sinkhole activity, so it is imperative that policyholders verify that they have the necessary coverage.

Take a look at this clip to see the full story:

It is important to remember to vacate your home immediately if you encounter a sinkhole similar to the one Lou Lambro discovered in his back yard. It is truly remarkable how fortunate Mr. Lambro and his family are. Sinkholes can cause catastrophic ground collapse in just seconds, leaving no time to flee to safety.

For more information on sinkholes and insurance coverage, I suggest you read the following blog posts:

If these blogs do not answer your questions, then please contact an insurance professional.

Courts Affirm that an Insured Must Comply with Post-Loss Duties

Denise Sze — Wed, 09 May 2012 07:33:02 -0500

After a major loss, an insured is devastated. It is at this time, that an insurance company is needed to aid the insured in accordance with the contract (policy) the insured and insurance company entered into.

It's also at this time that the insured’s duties to the insurance company kick in. An insured usually must 1) provide notice and a proof of loss outlining his or her losses; and 2) submit to the examination under oath (EUO) if requested by the insurance company. Often times, the insurance company will accompany a request for an examination under oath with an extensive request for documents. Insureds can be outraged by the numerous documents requested and feel that the document request is an onerous fishing expedition on the part of the insurance company.

Time and again, courts have indicated that an insured has the duty to comply with an insurance company's request because it is a precondition to coverage, and a lawsuit cannot survive unless an insured substantially complies with a policy's preconditions. On March 16, 2012, in the matter of Foster v. State Farm Fire and Casualty Company, the Seventh Circuit Court of Appeal confirmed that there is no breach of contract and bad faith without compliance.

In Foster, the insureds home was ravaged by fire. State Farm began a timely investigation of the fire and requested numerous documents, a proof of loss and an EUO. Eight months after the initial fire, the Fosters provided their proof of loss and submitted to their EUOS. The insurance company requested additional documentation because the Fosters provided new or changed information during their EUO and agreed to produce more documents during their EUO. As the one year statute approached, the insureds did not complete their additional EUOs or additional document production and filed suit. State Farm brought a motion for summary judgment, which was granted because the Court concluded that the insureds explicitly agreed to produce additional documentation and submit to an additional EUO, and this was not too onerous a burden. Specifically, the Court indicated that the insureds had a duty to obtain the documents in the possession of third parties, including tax returns and bank records.

Letting an insured know that they must comply with a document request, proof of loss and EUO or they may forfeit their rights under the policy and lose any subsequent rights to bring a suit is not only important, but a must. As we guide insureds through the maze of recovery, we see the hardship that insureds go through just to gather documents after a fire or other tragedy, but the reality remains that courts consider reasonable preconditions in policies official duties that cannot be circumvented.

Disciplinary Information Has Become Harder to Find Under New Texas Department of Insurance Commissioner Eleanor Kitzman

Sergio Leal — Tue, 08 May 2012 11:46:03 -0500

If you wanted to find out whether an attorney you were thinking about hiring has ever been disciplined by the Texas Bar, you can find that information online. It is made available to the public by the Texas Bar. The same goes for doctors, nurses, and a bunch of other licensed professionals whose overseeing regulators make such information available.

Dave Lieber of the Fort Worth Star-Telegram reports that until September 2011, the Texas Department of Insurance (“TDI”) made similar information about insurance companies and agents that violated state rules and laws available to the public. However, less than two months after Governor Rick Perry appointed Eleanor Kitzman to be the new TDI Commissioner, TDI’s practice of publicly releasing information on insurance companies and agents that violate state laws has come to an end.

Why is this information important? Well, a quick look at TDI’s September announcement showed that Great American Assurance Company was fined $195,000 for failure to file policy forms or endorsements containing property and casualty benefits and that the Texas Windstorm Insurance Association failed to process claims in a timely manner or pay claims for covered storm damages. If you were in the market for insurance, wouldn’t you like to know that Great American Assurance Company and TWIA ran into problems with the TDI? Of course you would!

TDI Commissioner Eleanor Kitzman will tell you that the information is still available. And she’s right. Well, sort of.

The latest TDI announcement, made on April 25, 2012, stated that seven insurance agents had their licenses revoked and paid fines and restitution totaling $270,950. But if you want to know the violator’s names, TDI informs you that “Copies of Commissioner’s Orders may be obtained by contacting TDI’s Public Information Office.”

Lieber noted that “[t]hat's an extra step that most consumers searching for the latest news on violators probably won’t take. And it protects the names of offenders since they will no longer show up in Internet search results.” Lieber’s research found that only 4 people had requested the list of violators in TDI’s April 25, 2012 announcement. So what was once publicly available information – easily accessible via the world wide web – now requires a letter to TDI requesting that information.

Lieber mentioned that prior to Perry appointing her TDI Commissioner, “Kitzman ran as a Republican for South Carolina lieutenant governor in 2010, and she collected more than half her donations from the insurance industry, according to reports.”

If you don’t like the new TDI change, Lieber noted that the decision to withhold this information can be changed, but it is up to you, the citizen, to email your thoughts about the policy to PIO@tdi.state.tx.us or write to TDI Commissioner Eleanor Kitzman at P.O. Box 149104, Austin, Texas 78714-9104.

Residents Of A Condominium Association In New Orleans Find Out Their Unit Is In The Basement...At Least By Its Legal Definition

Shaun Marker — Mon, 07 May 2012 10:25:17 -0500

Is it possible to have a basement in New Orleans, a city where some areas are actually below sea level? That was the question facing the Fifth Circuit Court of Appeals in King v. Casa Grande Condo. Assoc., Inc., 416 Fed. Appx. 363 (5th Cir. 2011).

The case involved a lawsuit brought by a condominium unit owner against the association for negligence in obtaining adequate insurance and for certain negligent actions in pursuit of a claim on the unit owner's behalf under the association’s flood insurance policy. The association’s flood policy was primary to that of the unit owners, so that the unit owners were not entitled to any payment by their individual flood insurers unless and until the association’s flood policy limit was exhausted.

An insurance company adjuster determined that the association property suffered $46,414.37 in covered building damage, including $2,324.04 in damage to the plaintiff's unit. It was discovered that there was a clerical error and, although the condominium was valued at $2,471,000, it obtained only $247,100 in building coverage. Because Casa Grande had underinsured the property, the flood insurer imposed an eighty-six percent co-insurance penalty and issued payment for $5,498.01 of the $46,414.37 in damages. The condominium association gave the plaintiff $275.29, representing the unit owner's share of the damages.

The plaintiff filed the lawsuit against the association and there was a bench trial, in which plaintiff alleged the association acted negligently in failing to obtain adequate insurance for the property, accruing a co-insurance penalty that reduced the recovery for damage to the unit, and for failing to pursue additional damages from the association’s flood insurer and its insurance agent on the plaintiff's behalf. The district court found for the plaintiff.

On appeal, the association argued the plaintiff's unit was subject to the policy limitation for basement property. The flood policy limits coverage for basement property to clean-up costs and to certain enumerated items such as drywall and central air conditioners. Accordingly, the association claimed the district court erred in holding it liable for the full measure of the plaintiff's flood-related repair costs.

The appellate court looked to the definition of basement within the Standard Flood Insurance Policy (“SFIP”). “Basement” was defined as “[a]ny area of the building, including any sunken room or sunken portion of a room, having its floor below ground level (subgrade) on all sides.” The court noted the evidence suggested that the plaintiff's unit is subgrade, and therefore in a basement for the purposes of the SFIP. An elevation certificate of the unit was introduced as an exhibit at trial indicating its elevation is 2.6 feet, while the lowest adjacent grade is 4.4 feet. The court reversed the district court and remanded the case to determine the damages subject to the basement limitation.

In law almost anything is possible, as long as it is defined in a contract. The ultimate conclusion in this case was that the condominium unit is a basement, even though its floor is just 1.8 feet below the ground level in a city where many areas are below sea level.

Red River Waterway's 15-day Closure Caused Millions of Dollars in Losses - Understanding Business Interruption Claims

Michelle Claverol — Sun, 06 May 2012 13:03:48 -0500

Traversing over 225 miles, the Red River Waterway has become a strategic cargo and customs hub for the South. It is linked to the Mississippi River and Gulf Intracoastal Waterway and it also sits amidst a Louisiana Highway system, major interstate highways and Louisiana’s railway system, which can deliver cargo to any city in the United States within 7 days. Along the River, there are a series of 5 lock and dam structures that perform a stair step effect on the river, creating controllable pools and passageways for river traffic. There is also a network of public and private ports and surrounding industrial complexes that heavily rely on barge transport of oversized cargo that would be impossible to move by land or air.

The Lindy C. Boggs Lock and Dam experienced a mechanical gate failure on April 2, 2012. The Red River Waterway system schedules maintenance waterway closure typically for 1-2 days per year, but the unexpected failure trapped five southbound vessels with tows until its reopening on April 17, 2012. The costs of closing the Red River Waterway in Louisiana for 15 days haven’t been fully totaled, but they’re adding up to millions of dollars.

The Insurance Journal recently published an article from the Shreveport Times:

Since the lock near Marksville reopened, Red River Valley Association Executive Director Richard Brontoli has been collecting data from affected companies and compiling information about the closure’s impact to the waterway economy. The data is still incomplete, pending shipping firm reports.

However, the costs are many and varied, Brontoli told The Times and they affect the shipping and user companies and Red River Waterway entities like the Port of Caddo-Bossier. They include costs associated with unavailable equipment, crew and cargo maintenance, and tow rental costs.

Some of the stalled barges were empty and on the way to be reloaded, Brontoli said. Others carried petroleum, scrap metal and other commodities.

He said demurrage, the cost associated with delay of cargo, averages about $250 per day per barge. Each of the six tows held up on the waterway was pulling six barges — for a $135,000 total impact.

Barges carrying cargo bound overseas must arrive on time, or the cargo must be replaced and delivered from a different source, Brontoli said. That can be a huge expense — at least $1 million for stalled petroleum barge, he said.

Stalled equipment earns no revenue, but, worse, disrupts companies’ scheduling for weeks, Brontoli said. Shipping companies couldn’t meet pending contracts, requiring them to send other assets or contract with other companies or divert other assets. There are also losses due to missed opportunities because the equipment is unavailable for potential future deals and contracts.

Are these losses insured and recoverable? It depends. Cost and Freight insurance as well as Machinery in Transit or Project Delay Insurance, if purchased, may help offset the costs of the product delivery delay. However, the estimated cargo delivery losses is minimal ($135,000) compared to the economic losses sustained as a result of the waterway shut down. Depending on the language of the commercial policies in effect during the two-week shut down, these losses may be covered by some Difference in Conditions (DIC) policies, Extra Expense Provisions or even Contingent Business Income policies. However, the definition of “damage” under these potential coverage forms (whether “physical” or “loss of use or functionality”) will be the topic of controversy for months.

Contents Inventory Smart Phone App and Documenting Your Personal Property, Part I

Nicole Vinson — Sat, 05 May 2012 08:47:17 -0500

Yes, there is an app for that. The National Association of Insurance Commissioners has created a phone application that was designed to quickly capture images, descriptions, bar codes, and serial numbers to make a contents inventory for homes or businesses before disaster strikes. This free app allows iPhone and Android users to organize information by going from room to room and documenting their property. The app also allows the information to be put into a spreadsheet and sent via email for safe keeping.

The NAIC’s website gives more information about preparing for a loss by making an inventory of items and offers forms you can download.

I downloaded the application and tried it at my own house. There was a lot to like about the application.

The benefits:

It is very user friendly. Because it is so easy to use the email function, it is likely that those who start the program will finish it and, as a result, they will have their list and photos saved in a safe location.

Once you have made the list, you can save the photos and the app takes your information and compiles a spreadsheet of the items in an easy to read log.

You can take multiple photographs of each item you inventory.

The serial number scanner is impressive. If you hold your phone over the item with a serial number, the phone can detect the number and save it for you. No typing required.

The app has a section called "Preparedness" that is filled with numerous tips that could help any insured. Be sure to check out "What to do after a storm if your home is damaged" and "Additional Coverages".

However, as an attorney who represents policyholders, I have a few critiques of the program:

The type of information listed on this app could impede your insurance claim if sent directly to the carrier. For each item the user wants to catalog, the app allows photos, a description of the item, the purchase date, purchase price, serial number, and a category. The problem is that many policies of insurance may require different information when an insured actually files a contents claim. For instance, if the policy of insurance is a replacement cost personal property policy, the insured should be paid the amount each item costs to replace. If the insured inserts the purchase price on an inventory form that is submitted to the insurance company and the insured does not also include a replacement cost number, the carrier may just pay the purchase price. This can be problematic if the item increased in value since the time of purchase.

Purchase date is another category that could be more of an impediment to a policyholder. Many insurance policies require the insured to give an age of the item. Checking the section "Duties After a Loss" will spell out more specific information needed in a particular policy. If the insurance company only requires that you give an approximate age of an item, this is not the same as purchase date.

Ages of the items should be logged. When I was analyzing my own items, I had a hard time remembering the year I purchased the item, let alone the specific date. If insureds use this app and inventory their items giving approximate dates, the spreadsheet does not reflect this approximation. Instead, the date is locked in and if an insured makes an error about the dates, the insurance company may allege a misrepresentation even though it was simply a mistake. Since there may be no need to even provide a purchase date, this field should be changed.

The default date could cause problem. The app had a default date in the system and I could see that default information being used unintentionally in an inventory submitted to an insurance company, causing the insurance company to question an insured about the accuracy and honesty of the list as a whole.

Categories of items are unnecessary. An insured does not have to label their personal property into certain categories of items unless it is required in the policy. Most policies only require a description of an item. If you use this app and categorize an item like a jewelry box under the jewelry category, the insurance company may improperly apply a jewelry limitation and not pay for this item if the limit is reached.

The app does not lock. While you can set a passcode for your cell phone, you have to delete the app if you want this information to be removed from your phone. If you make an inventory of your household goods and your phone is stolen, the thief has a good preview of your cherished personal property and the rooms where you keep your valuables. The app should have its own lock or other security measures.

Overall, the ease of this app makes it one for policyholders to use. Even if you only have to the time to document 10 items in each room, if you have a loss, you are 10 steps ahead. But the inventory made by the application should not be forwarded to an insurance carrier without conforming the list to the policy requirements. Insureds should check the requirements of their policies and prepare their lists to make sure claims are properly processed.

Next week, I will write about the NAIC and its recent connection with United Policyholders.

Bad Faith: Goods are Just as Good as Dwelling

Vivian Persand — Fri, 04 May 2012 19:50:23 -0500

Typically when I write about bad faith cases, the focus is damage to the interior or exterior of a residential dwelling or commercial building. There are, however, other types of claims for property damage. This week, I am writing about an insurance policy that was issued to cover goods kept in a warehouse.

Dr. T's Nature Company was a manufacturer of animal and insect repellent. Dr. T leased a warehouse in which it stored some of its product. Dr. T was constructing steel pallet racks in its warehouse facility, and, until the completion of the racks, the landlord allowed Dr. T to use a warehouse located across the highway. The landlord did not charge Dr. T additional rent because they agreed that the warehouse across the highway was only to be used on a temporary basis. The temporary warehouse was destroyed by a fire along with all of Dr. T's products. Dr. T submitted a claim to Southern Trust for the loss.

Southern Trust relied on the following provision to deny the claim:

You may extend the insurance provided by this Coverage Form to apply to your Covered Property, other than ‘stock,’ that is temporarily at a location you do not own, lease or operate.

Southern Trust claimed that because Dr. T's products were in a temporary warehouse that he did not own, lease or operate, his products were not covered. The lower court disagreed with Southern Trust and found it breached the policy by failing to provide coverage for Dr. T's products in the temporary warehouse. A Georgia appellate court agreed with the lower court on the breach of contract claim. With regard to the bad faith claim, the appellate court agreed with the lower court’s finding that a determination of the bad faith issues needed to be deferred.

Policyholders cannot always bring a bad faith claim at the same time as a breach of contract claim. Each case will depend on the particular facts and the law in a specific jurisdiction. Policyholders contemplating a bad faith suit should contact experienced counsel.

The Value in Florida's Valued Policy Law: The Importance of Being Adequately Insured

Larry Bache — Thu, 03 May 2012 12:53:16 -0500

Florida Statute §627.702 is Florida’s Valued Policy Law. In short, the Valued Policy Law provides an insurer is liable for policy limits if a covered loss destroys a covered structure. This is significant because when disaster strikes, policyholders do not want to be entangled in disputes with their carrier.

For the Valued Policy Law to apply, two requirements must be met: (1) the loss must be caused by a covered peril, and (2) the structure but be a total loss. To make a policyholder whole after a loss, the insured must purchase an adequate amount of insurance. If policyholders are not fully insured, they may not be able to rebuild if they suffer a total loss. A common example is the following:

A fire burns down a single family home insured for $100,000. If the peril causes a total loss and is determined to be a covered peril under the terms of the insurance policy, the carrier is generally obligated to tender the policy limits. If the property in our example costs $110,000 to rebuild, the policyholder must come out of pocket $10,000 to make up the difference.

According to one Florida appellate court, the purpose of the law “is to simplify and facilitate prompt settlement of insurance claims when total loss occurs, serving to remove what otherwise would be a troublesome issue to be determined by negotiation or litigation.” Springfield Fire & Marine Ins. Co. v. Boswell, 167 So.2d 780.

In a time of peril, policyholders’ lives are turned upside down. As explained in Boswell, the purpose of Florida’s Valued Policy Law is to help insureds return to their pre-loss condition. This allows policyholders to focus on more important issues, including relocating and recovery instead of fighting over the value of their destroyed property.

Some authorities suggest having your property appraised every year, and some suggest less frequently. That decision lies on each individual, but policyholders should be aware of the consequences of being underinsured.

It is important to note that this statute speaks in terms of the building only, and other coverages may need to be addressed differently. If you have questions, please consult an insurance professional.

Homeowners, Public Adjusters and Roofers in Colorado: Call Or Email Governor Hickenlooper And Ask Him To Veto Senate Bill 38

Erin Kristofco — Wed, 02 May 2012 12:22:27 -0500

Although insurance company lobbyists were successful yesterday in passing Senate Bill 38, homeowners, public adjusters and roofers can still make their voice heard by calling or emailing Governor Hickenlooper, and informing him why he should veto the bill.

Senate Bill 38 should be vetoed because it actually harms consumers, and contains few consumer protections. Insurance companies successfully convinced some legislators that the bill was about preventing unscrupulous roofers from waiving insurance deductibles. However, waiving a deductible is already prohibited under Colorado law (see CRS 18-13-119.5 related to Abuse of Property Insurance), and its insertion in this bill is a red herring. This bill is fundamentally about giving insurance adjusters more power to control the scope of work-- and that is why the insurance companies drafted the bill and pushed it so hard. The bill directly increases insurers’ profits by allowing them to control the scope of work on every residential roof in Colorado.

The bill passed due to a flawed process. Insurers refused to bring other groups to the table, and left consumer advocates out of the drafting entirely. Neither the Division of Regulatory Agencies, nor the Division of Insurance was brought into the drafting process—again, likely because those agencies would have advocated for consumers. The bill sailed through the senate because insurance companies kept it “under the radar.” Not one consumer advocacy group testified at senate committee or on the senate floor. Thereafter, the insurance lobby delayed the committee hearing, and quickly moved the bill from House sponsor Representative Vaad, over to Representative Priola when consumer groups and roofers became aware of the bill and began objecting to it.

Finally, on April 29, the bill came up on the House floor but was tabled, to be heard the following day. For unknown reasons, the bill was unexpectedly brought back up on the House floor the same day, April 29, after roofers, public adjusters and consumer advocates had left for the day. The bill passed, but the 20 votes against the bill came from both republicans and democrats. The entire process was flawed and was dominated by the insurance lobby. As of April 29, the insurance lobby had at least twelve lobbyists pushing the bill.

Insurance companies are not consumer advocates, and this is a bad bill. Insurers drafted this bill to give their insurance adjusters even more power than they already have. In the last section of the bill, specifically 6-22-105 (2)(A), it is the insurance adjuster who gets to make the determination as to whether the roofer has violated a law and attempted to waive a deductible, and it is the insurance adjuster who gets to then refuse to consider the scope of work from that roofer. This wording creates an incredible new power for an insurance adjuster who may be just out of high school or just out of adjuster's school, and who may know little about roofs, or roofers' bids and scopes of work.

Consumers will ultimately suffer when insurance adjusters are given this new, increased power to control the scope of work on the consumer’s home roof repairs. [Click this link to listen to conservative radio talk show, Grassroots Radio, The Source 560 AM, criticizing the bill, as well as Republicans and Democrats who voted for it.]

Some final notes:

Not one consumer advocacy group backed this bill. Consumer advocacy groups, like United Policyholders, a non-profit, non-partisan consumer advocacy group, wanted the bill amended or voted down.

Sections 6-22-101 through 6-22-104 provide some protections for consumers. However the last section, 6-22-105, provides no protection for consumers and actually burdens homeowners with even less protection—leaving homeowners to fight both their insurance company, and unscrupulous roofers.

This bill forces homeowners to carry the burden of prosecuting unscrupulous roofers—yet most homeowners don’t have the financial ability to hire a lawyer, nor the time to fight roofers and their insurers.

This bill may be on the Governor’s desk as soon as Thursday, May 3. Take time today to email or call Governor Hickenlooper, at 303.866.2885, and explain why the bill should be vetoed.

In California, Homeowners Insurance Policies Must Disclose What Kind of "Replacement Cost" Coverage Exists for the Insured

Denise Sze — Tue, 01 May 2012 06:46:59 -0500

After a property loss occurs, an insured is always responsible to show the amount of loss claimed. We are often asked whether a policy covers "replacement cost" value (RCV) or "actual cost" value (ACV). Although an insured may not be familiar with these terms, the RCV versus ACV valuation of property can determine whether an insured is made whole under their homeowners policy after a loss. California Insurance Codes Sections 10102 and 10103 require insurance companies to disclose upfront the insurer's obligations.

The Insurance Code Section 10102 states:

(b) The agent or insurer shall indicate on the disclosure form
which coverages the applicant or insured has selected or purchased.
* * *
(d) Following the issuance of the policy of residential property
insurance, the insurer shall provide the disclosure statement to the
insured on an every-other-year basis at the time of renewal.
* * *
(g) Coverage provided for building code upgrades by a policy of
residential property insurance shall be applicable to building codes,
ordinances, standards, or laws only to the extent that those codes,
ordinances, standards, or laws do not impose stricter standards on
the property on the basis of the level of insurance coverage
applicable to the property.

When calculating a loss under a homeowners insurance policy, look to the policy itself and the required statutory disclosure requirements set forth under California insurance law. Upon initial issuance of the policy and every second year on renewal, the insurance company must provide a disclosure form that describes the principal forms of insurance coverage for residential dwellings available in California. This form must disclose and identify the form of dwelling coverage that the insured has purchased. The Code is clear in that the insurance company is specifically responsible for clearly and unambiguously stating whether the insured has purchased "replacement cost coverage," "guaranteed replacement cost coverage," or "actual cash value" coverage. Additionally, the Code requires that these disclosures indicate whether or not the homeowner's policy covers "costs resulting from code upgrades."

It's important for every insured to ask questions and to know upfront what kind of coverage they are purchasing. Knowing the type of coverage prevents issues with underinsured and coinsurance issues, depending upon the policy.

"Credibility Determinations, The Weighing Of The Evidence, And The Drawing Of Legitimate Inferences From The Facts Are Jury Functions, Not Those Of A Judge...On A Motion For Summary Judgment"

Shaun Marker — Mon, 30 Apr 2012 09:24:26 -0500

This is a quote from a recent trial court order in a New York state case where Nationwide asked the judge to decide in its favor without submitting the case to the jury. Congregation Chesed L'Avraham d/b/a V'Kollel Ohel Moshe Society v. Nationwide Mutual Insurance Co., No. 19954/09 (N.Y.S. Sup.Ct. Kings County 2011). Since the practice of law is an art, there is not a bright line rule as to when the facts of a case support an insurance company’s motion for summary judgment. Some insurers file them regularly to see if they can get a favorable ruling without the need for a jury trial.

In this case, the policyholder claimed that on December 12, 2008, it sustained windstorm and ensuing water damage to the building and its interior. Nationwide denied coverage, claiming that either the rain alone caused the loss or it was caused by the policyholder’s failure to properly maintain the roof and drain. Nationwide cited the following policy exclusions:

We will not pay for loss or damage caused by or resulting from ... Faulty, inadequate or defective ... Design, specifications, workmanship, repair, construction, renovation, remodeling, grading, compaction; or Maintenance.

We will not pay for loss or damage to property ... caused by or resulting from rain, snow, sleet, ice, sand or dust, whether driven by wind or not, unless: (1) The building or structure first sustains damage by a Covered Cause of Loss to its roof or walls through which the rain, snow, sleet, ice, sand or dust enters; or (2) the loss or damage is caused by or results from thawing of snow, sleet or ice on the building or structure.

In support of its motion, Nationwide filed affidavits of its independent adjuster and engineer who inspected the roof. They stated that the loss was not caused by a covered event or was caused by plaintiff’s failure to properly maintain the building. The court called some of their findings “conclusory.” For example, the court noted that Nationwide’s independent adjuster conducted inspections ten and seventeen days after the storm and saw extensive debris on the roof. Nationwide cited this fact to establish poor maintenance of the roof. The court pointed out that, to the contrary, a jury could reasonably conclude that the debris was caused by the storm and not by plaintiff’s inaction.

The trial court found that the policyholder demonstrated issues of material fact regarding the cause of damages. Among other things, the policyholder proffered climactic data which indicated the heightened wind gusts on the date of loss. Also, the policyholder submitted evidence that the air conditioning ducts on the roof were damaged and could have allowed water to enter the building during the storm.
The court held:

[a] trier of fact could reasonably conclude that a covered event damaged the roof and rain water subsequently entered the building through the previously-damaged areas of the roof, and that, therefore, defendant should have provided insurance benefits to plaintiff for the subject loss.

In this dispute, the defendant carrier, based on opinions of its adjuster and engineer, reach conclusions about the storm, the roof and the water damage that differ from the conclusions reached by plaintiff. However, since credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge ... on a motion for summary judgment, this court cannot find that either set of conclusions about the damaged roof and rain water are correct as a matter of law. The instant summary judgment motion must be denied.

In reaching its ruling, the court recognized that a summary judgment is not the place for a judge to substitute his or her view of the facts for that of the jury. There were differing interpretations of the facts reflected in the record, and the court made the interesting point that if it ruled in the insurer’s favor, it would deny the policyholder’s right to a trial by jury.

Thailand Flood Claims Are Expected to Be Higher Than Initially Estimated

Michelle Claverol — Sun, 29 Apr 2012 07:31:36 -0500

A recent online publication of Insurance Journal highlighted A.M. Best Co.’s quarterly estimates of insurers’ losses from the Thailand floods. The current estimate is $15 billion, a 50% increase since Best’s last briefing of Nov. 23, 2011. According to the briefing, the loss is now in a tie for the fifth (5th) costliest insured loss event in the past 31 years. It has been reported that the floods have damaged or destroyed more than 4 million homes, businesses, and manufacturing facilities and that the amount of structural damage is actually four times greater than the damage resulting from Japan’s earthquake and tsunami in March 2011.

In The Importance of Having a Plan B - Understanding Business Interruption Coverage, Part 97, I noted a trend that had been published in several claims magazines:

Many Japanese companies moved production to Thailand or found alternative component suppliers in Thailand after March's devastating earthquake and tsunami. The move helped many companies mitigate their losses in the Japan disaster, but many face further losses as a result of flooding in Thailand this fall.

The problem for insurers who provide business interruption cover to Japanese manufacturers is that they have to cover the losses stemming from the Thai flooding because so many businesses moved some or all of their supply chain there.

The February 2012 AM Best report confirmed the reported problems finding that:

Insured parties have several limitations on their ability to make CBI claims. If property insurance does not cover a certain peril, then related CBI claims will not be covered. Insurers could encounter reinstatement issues and face problems on first-loss limits from firms with multiple locations, as dates of damage vary for different industrial estates. Event limits were not always specified in Thai insurance contracts. Classifying the floods as multiple events could increase costs for the insurers/reinsurers that are involved. Many impacted companies moved to Thailand to mitigate losses from the March 2011 earthquake and tsunami in Japan. As a result there are increasingly complex “causation and adjustment issues.

The Best report further stated that “unprecedented flooding has forever changed the perception of risk in Thailand and brought about significant changes to the Thai insurance industry,” and that it expects to see “additional upward revisions to initial loss estimates given the overall uncertainties and previous experience with other significant, un-modeled losses.”

Public Adjuster Qualified to Testify in Florida Federal District Court- No Daubert Hearing

Nicole Vinson — Sat, 28 Apr 2012 09:02:10 -0500

If you have been following our blog, you might have read Expert Witnesses Must Remember Three Steps: (1) Qualifications (2) Reliability, and (3) Helpfulness, which discussed the U.S. District Court ruling in Palm Bay Yacht Club Condo. Ass’n, Inc. v. QBE Ins. Corp., 10-23685-CIV, 2012 WL 1345317 (S.D. Fla. Apr. 18, 2012). In that case, QBE’s Motion in Limine/Motion for Daubert Hearing was filed to prohibit Paul Norcia from testifing about various aspects of the plaintiff’s Hurricane Wilma claim.

As you will see from the prior post, QBE’s motion was denied and Mr. Norcia will testify next month regarding whether the structural components of the building were damaged by Hurricane Wilma, how much it will cost to repair the property, and whether certain building components should be repaired or replaced.

Paul Norcia is a public insurance adjuster and the owner of Norcia Insurance Consultants. While based out of Minnesota, Norcia Insurance Consultants assist insureds in Minnesota and Wisconsin, but Paul Norcia has an interesting background that was not mentioned in the Court’s recent order. While Mr. Norcia has assisted home and businesses owners for more the 28 years with insurance claims, he spent 24 of those years working at the direction various insurance companies as an independent insurance adjuster. Four years ago, Mr. Norcia stopped working for insurance companies and started helping policyholders as a public insurance adjuster.

In 2003, a terrible hail storm hit Minnesota, and Mr. Norcia was assigned to many of these cases as an independent adjuster for QBE. During his work on the hail claims, Norcia questioned QBE’s instructions on a large number of hail claims. Mr. Norcia explained that more than 90 condominium associations in his territory were damaged by the hail storm but QBE was asked Mr. Norcia to send letters to the insureds instructing them to demonstrate damages worthy of payment. This request went against all of Mr. Norcia’s training and experience as an insurance adjuster. He knew it was the carrier’s job to adjust and investigate the damages but QBE persisted, and Mr. Norcia became a public insurance adjuster. In Palm Bay Yacht Club, QBE challenged its former agent’s methodology and qualifications, even alleging that Mr. Norcia had little to no personal experience with roofs and windows.

The Court recognized that the insurance company should not forget it considered Mr. Norcia was qualified--- when he worked for them “Mr. Norcia’s vast experience in insurance matters has qualified him to offer expert opinion testimony about property insurance loss valuation, which includes…whether observed damage was caused by a wind event like a hurricane.” The Court also reminded the parties, “ the methodology employed by Mr. Norcia in determining whether a building component required repair or replacement is exactly the same process by which QBE’s own adjusters evaluate a property damage loss.”

Court Rules on Insurer's Burden of Proof for Defense of Misrepresentation

Vivian Persand — Fri, 27 Apr 2012 12:31:28 -0500

Most of my blog posts are about hurricanes, roof leaks and fires This week I write about a theft claim submitted under a property insurance policy. American Pepper was a business insured under a policy with Federal Insurance Company. When property was stolen from American Pepper, notice of the loss was given to Federal. After its investigation, Federal sent a letter denying the claim under the concealment and misrepresentation provisions in the policy.

The concealment provision in the policy reflects, in part, the following:

This insurance is void if you or any other insured intentionally conceals or misrepresents any material fact or circumstance relating to this insurance at any time.

Federal referred the claim to its special investigations unit on grounds that the claim was suspicious because of alleged inconsistencies regarding where the stolen property was actually located at the time of the theft and the actual items stolen. American Pepper sued Federal for breach of contract and bad faith. During the trial on the matter, the Court told the jury that Federal had to prove the policy defense of concealment or misrepresentation by “clear and convincing” evidence . The jury ruled in favor of American Pepper and awarded $15,000. The Supreme Court of Arizona later examined what the burden is for an insurance company when, as a defense to a claim, it asserts concealment or misrepresentation.

American Pepper took the position that the higher burden of "clear and convicing evidence" applied because Federal's defenses of concealment and misrepresentation sounded in fraud. The Court, however, agreed with Federal, that the appropriate burden of proof for Federal's defense of concealment or misrepresentation was a "preponderance of the evidence." As such, the Supreme Court of Arizona sent the case back to the lower court for an application of the appropriate standard to American Pepper's breach of contract and bad faith claim against Federal.

Please keep in mind that this ruling is specific to Arizona. Other courts might rule differently on the same issue.