Now That Insurers Can’t Legally Enforce Their $5,000 Wildfire Smoke Damage Caps, What Have They Done To Make Up For Their Unanticipated Losses?

Daniel Verhoff | Property Insurance Coverage Law Blog | September 12, 2019

Many insurance companies thought they would have to pay no more than $5,000 for each California wildfire claim but are ending up paying hundreds of thousands if not millions.

These companies sought to reduce their exposure to wildfire losses by capping their liability for wildfire smoke, soot, char, and ash claims to $5,000. These carriers include CSAA, Mercury, Farmers, and others. (See an example of these provisions on United Policyholders’ website.1) So why can’t these insurance companies enforce this limitation, and what are they doing about it?

The limitation violates California law. Under Insurance Code sections 2070 and 2071, insurers can only have a dollar limit for the total amount they will pay for damage caused by the peril of fire. This rule prevents carriers from dissecting the various fire perils, including smoke, char, soot, ash, and odor, and applying separate, smaller sub-limits.

This law has been in place for many, many years. But despite the law, carriers sold their policies with the endorsement in attempt to limit their exposure. The fun ended for these insurance companies when California courts ruled the endorsements were unenforceable.2 In a class action suit on the subject, Mercury argued that “the endorsement is not governed by sections 2070 and 2071 because damage from smoke is not covered by those sections and is permitted ‘extended coverage’ for a peril separate from fire, i.e., wildfire smoke.” The court disagreed and held that California law clearly prohibits an insurer from setting a sub-limit for the certain fire perils, including smoke damage.

What happens when some of the biggest wildfire insurers planned to pay no more than $5,000 per claim, but end up paying hundreds of thousands if not millions for each of several thousand claims? Like all insurance companies, they used complex formulas and models to determine how much money to collect from their customers (through policy premiums) to survive a potential catastrophic disaster like a wildfire. In situations like this, where insurers are often paying more than 100 times the expected amount for each claim, profitability goes out the window and their survivability comes into question.

In our experience, the average home impacted by wildfire smoke, soot, char, ash, and odor claim will cost hundreds of thousands of dollars to remediate. These costs are the product of high real estate prices, extremely limited labor after a wildfire, costly experts, and the remediation of soft and porous goods which trap smoke particles behind walls, under floors, within ceilings, HVAC units, and the like.

Unfortunately, our experience tells us that the carriers who thought they’d only be paying $5,000, but are now paying a lot more, are trying to reduce the amounts rightfully owed to customers, such as relying on unqualified experts in order to reduce their losses.

If you are experiencing similar treatment for an insurance company, this may be a reason why. We have attorneys that cover all of California.
2 See Marrufo v. Automobile Club of Southern California, Case No. BC597839 (Cal. Super.  May 10, 2018).

Restoration Contractor Revenue and Profit Is Important If Policyholders Are Going To Get Quality Work

Chip Merlin | Property Insurance Coverage Law Blog | September 10, 2019

Steve Patrick is a guru for those estimating property insurance losses. He made a suggestion on Level The Playing Field, for a construction book, Markup & Profit: A Contractor’s Guide, Revisited. His suggestion caught my eye since Merlin Law Group keeps this work in our reference library. This book is an excellent reference which contractors, property loss estimators, and property loss adjusters can use to help when considering reasonable construction pricing.

Without proper pricing, many contractors will be tempted to skimp on skilled labor, quality materials or the time of labor to properly do the job. Yet, many insurance companies seem a lot more concerned about paying as little as possible rather than providing a sufficient amount of time or money to do a quality restoration.

From what we see in the field where insurance company and independent adjusters are evaluating the amount of the loss, insurers provide little time for their own adjusters to do a quality adjustment job. From what little they pay their front-line adjusters, insurance companies are being run by bean counters rather than servicing the product they sell. No wonder there is a war going on between restoration contractors and the insurance industry.

Another book which I purchased this Spring—and strongly suggest all owners of small roofing and construction companies should thoroughly read—is Profit First For Contractors. The book notes that the insurance industry’s insistence on 20% overhead and profit is a ridiculous standard and explains why from a purely economic analysis:

What are some of the commonly accepted industry standards that will drive your business into the ground?

A contractor is not supposed to charge more than 20% for overhead and profit.

Wrong. A 20% markup yields a 16.7% margin. If you have expenses of 20%, then you are making a-3.3% net profit, otherwise known as going out of business. Some healthy construction businesses could have expenses as high as 23% of total revenue. And in order to thrive, most construction businesses should be earning a 10% net profit. That’s a 33% margin (23% plus 10%). A markup of 50% produces a 33% margin. Imagine telling customers your markup is 50%. They would have a conniption.

If we the lawyers are studying these construction reference materials, I would suggest that it is probably a lot more important for roofers and contractors to do the same.

I have discussed the pricing issues in Restoration Contractors Providing Great Quality Workmanship Are Policyholder Friends But Many Insurance Companies Refuse To Pay For Quality. One problem is the suspect pricing which Xacitmate is using. Contractors, estimators, and public adjusters should be double-checking the pricing Xactimate is using against local and reasonable pricing. I would suggest those involved with property loss estimating also consider Getting the Xactimate Construction Price Right!

Coverage Gaps Plague Policyholders! Merlin Law Group and AAPIA Host Webinar Explaining What Is Being Done To Fight This Problem

Chip Merlin | Property Insurance Coverage Law Blog | September 11, 2019

Holly Soffer is General Counsel to the American Association of Public Insurance Adjusters (AAPIA). Strangely enough, we met and started a dialogue about Insurance Coverage Gaps at a half-day leadership conference hosted by the National Association of Public Insurance Adjusters (NAPIA).

APPIA leadership is doing something about this issue by meeting with insurance regulators and state legislators. They are showing that coverage gaps are harming policyholders and are caused by re-written insurance policies from heretofore standard coverages which did not have these gaps.

In a paper that Soffer provides to educate those about coverage gaps, she writes:

Would your homeowner’s insurance cover you for a loss in your home? Water claims are the most common claims, and many policies leave you far from being made whole after a loss due to water damage.

Consider this typical scenario: You, the homeowner, return home from a weekend away and take a shower, only to find that upon doing so, the living room ceiling under that shower gives in under the weight of water and there is now a pool of water on the hard wood floor and furniture underneath. Your college age son has been staying at the house while you were away. You immediately call your son, who says, ‘I think I saw a stain on the ceiling a few days ago, but it’s a high ceiling, and I wasn’t sure. In different light, I didn’t see anything.’ You then call your homeowner’s insurance carrier, assuming that the damage will all be covered, and you will be made whole so that your home looks like it did before the water damage.

Unfortunately, you learn that all of your damage may not be covered, and that what you thought was a simple matter is actually very complex. The extent to which you will be covered, if at all, for the ensuing damage from the loss will depend upon the specific wording of your insurance policy, a policy that you most likely have never read, and is difficult to understand, even by insurance professionals. We call this gap between what you as a consumer reasonably believe is covered by your policy, and what is actually covered, a ‘coverage gap’.

Insurance restoration contractors and policyholders need coverage to rebuild structures after losses occur. Public adjusters have nothing to adjust if there is a huge coverage gap. We need to educate and then promote laws and regulations which will fix this significant problem. Merlin Law Group is dedicated to this worthy fight.

On Thursday, September 26 at 12:30 EST, Merlin Law Group and AAPIA will host an introductory 30-minute webinar on the issue of coverage gaps and what can be done to stop this problem. Yours truly and Holly Soffer will moderate this discussion. Rutgers insurance law Professor Jay Feinman, the author of Delay, Deny and Defend will have a guest video appearance about his work on the topic and what you can do to help.

More details will be forthcoming, but this is something worth fighting for.

Insurers Help Design Luxury Homes to Mitigate Disaster Losses

Suzanne Barlyn | Claims Journal | September 3, 2019

Bruce Gendelman wanted a mountainside retreat when he bought 12 acres in Aspen, Colorado. But forest fires that have torched nearby land in recent years left him concerned.

So Gendelman, who runs an insurance brokerage, tapped into a program that American International Group Inc offers to help design luxury properties in ways that mitigate disaster risk. A risk specialist made sure his home had a lightning-repellant system, cisterns to hold water run-off and ceramic shingles that look like wood. Just in case a blaze does break out, his driveway was designed to accommodate a fire truck’s maneuvers.

“It’s a very high-end home and we’re dealing with very good contractors,” Gendelman said. “But (the AIG program) brought them systems they never used and resources they never heard of.”

Fires, floods, hurricanes and other catastrophes have cost U.S. insurers more than $170 billion in property losses since 2016, according to Property Claim Services (PCS), part of Verisk Analytics Inc, and the U.S. Bureau of Economic Analysis.

Few actuaries expect the trend to ease as climate change accelerates, and the swell of claims has prompted some insurers to get involved in the design process for lavish residential properties.

Insurers and industry groups said they do not track data on the service, which is still a tiny part of the property-casualty insurance industry. But executives, real-estate developers and brokers, builders and analysts who spoke to Reuters said they believe it will only expand.

“People don’t naturally think of insurance as the first place to go,” said Jennifer Naughton, head of North American personal insurance risk consulting services at Chubb Ltd . “But an insurance company can give you an advantage of the loss potential and might save you the pain of loss in the future.”

Chubb’s risk managers make sure homeowners who request the service have water storage on the property to supplement the local fire department’s resources, and recommend devices that allow emergency workers to open electronic entry gates, among other measures.

The trend is not entirely new: PURE Insurance has offered the service since its founding in 2007, and others have quietly made risk specialists available to customers who are designing a home and know to ask for the service. But it is now picking up steam as a stand-alone business at some major property-casualty insurers, as more clients worry about extreme weather.

AIG started marketing its service as “Smart Build” in 2015. Initially, only residential construction projects that cost more than $5 million were eligible, but AIG lowered the threshold to $1 million two years later.

AIG would not say how many homes it has helped design in total, but a spokesman said there were 20% more projects enrolled during the first six months of 2019 than in the prior-year period.

Cincinnati Insurance Companies joined the fray more recently, as did Vault, a high net-worth insurer launched in 2017 by a group of former AIG executives. W.R. Berkley Corp is also looking to offer the service as it ramps up business with wealthy clientele.


The home design process typically begins with an insurance risk specialist scoping out a site to assess possible dangers. For instance, if there is a high water table underground or a nearby body of water, they may suggest elevating the home or choosing another place to build to avoid the risk of flooding.

Ken Vona, who heads KVC Builders LLC and frequently teams up with PURE, recalled a couple who decided against a location because the house would have to be raised some 18 feet (5.5 m)off the ground to guard against flood risk.

“A perfect example of ‘bad piece of property, nice view,’” he said.

Once a site is selected, specialists review architectural plans, making sure designs are resistant to water and fire damage, among other risks. They scrutinize plumbing layouts, help design hurricane-proof storage rooms to protect valuables, vet the adequacy of sprinkler systems, measure driveway entrances and make sure there is a hydrant nearby.

Cameron Strothman, a senior risk manager for AIG Private Client Group, said he once had to figure out how to protect a site that was four miles away from the nearest hydrant. He liaised with the local fire department and advised the client to install a 30,000-gallon tank under the driveway so that fire trucks could tap a private water source instead. It cost $35,000.

Risk specialists’ suggestions generally represent 10 to 15% of total building costs, insurance experts said.

Some of the features are things homebuilders would likely install anyway, like a sophisticated fire alarm or sprinkler system, or measures required by building codes. Others cost very little money but can prevent extremely expensive damage. For instance, there is a $100 sensor that shuts off water systems after detecting a leak.

Adding these features at the time of construction is also cheaper than doing so once the home is built, risk experts said. A protective storage room for fine art may run less than $100,000 if designed into the plans compared to millions of dollars later, said Steve Bitterman, Vault’s chief risk services officer.

Gendelman would not disclose the costs associated with building or protecting his home, but said AIG did not charge him for the advice.

“Providing this service free is smart for everyone,” he said. “They help me with ideas and they get a loyal client.”

What Will a Denial of Costs Actually ‘Cost’ You?

Lori Bethea | Chartwell Law | September 6, 2019

Jennings v. Habana Health Care Center, 183 So. 3d 1131 (Fla. 1st DCA 2015), has been the law for almost five years, but many claims adjusters are still routinely denying entitlement to costs when responding to a petition. If you’ve been in this industry for a while and feel confident you have provided the requested benefits timely, you know it’s second nature to answer a petition indicating “costs and fees are not due or owing.” However, following the Jennings opinion, this blanket denial of entitlement to costs can have significant consequences, including exposure for attorney’s fees where fees would not have otherwise been due.

In Jennings, the First District Court of Appeal held that a claimant can be entitled to litigation costs even when the requested benefit has been timely provided. A quick recap of the facts in Jennings:

  • September 9, 2014 – claimant filed a PFB for authorization of the orthopedic evaluation;
  • September 11, 2014 – the carrier received the claimant’s PFB; and
  • September 12, 2014 – the carrier notified the claimant’s attorney of an appointment with an orthopedic physician (to occur on September 15, 2014).

The JCC found the claimant was not entitled to costs because the employer/carrier timely responded to the petition pursuant to §440.192(8) and §440.34(3)(d), F.S., and, therefore, she was not the prevailing party. Unfortunately, the First District Court of Appeal found that timeliness is irrelevant in addressing entitlement to costs, as the statute specifically distinguishes between entitlement to costs and entitlement to attorney’s fees. Pursuant to §440.34(3), F.S., “if any party should prevail in any proceedings before a judge of compensation claims or court, there shall be taxed against the non-prevailing party the reasonable costs of such proceedings, not to include attorney’s fees.” The court found that, pursuant to the statute, there is not a time limitation for determining entitlement to costs and, based on the record, the claimant was the prevailing party since her petition included certification that she made a good faith effort to resolve the dispute over benefits, prior to filing her petition, and the employer/carrier did not challenge that certification.

In light of this decision, it is crucial for adjusters to take an extra step, upon receipt of a petition, to confirm whether or not the claimant made a good faith effort before filing the petition so the adjuster can accurately respond on the issue of cost entitlement. If the claimant made a good faith effort, the carrier should concede entitlement to costs associated with the filing of the petition even if the benefit is provided timely. Otherwise, entitlement to costs remains an issue to be litigated, which has recently led some judges of compensation claims to award attorney’s fees for securing the “benefit” of proving entitlement to costs. In these cases, denying cost entitlement (where costs were due) resulted in carriers paying thousands of dollars in attorney’s fees for benefits they timely provided.