Insurance Company’s Long Duration of Negotiations and Stalling Tactics Supports Plaintiff’s Claim for “Bad Faith”

Christina Phillips | Property Insurance Coverage Law Blog | December 22, 2018

Illinois’ solution to an insurance company’s delay, deny and defend tactics is section 155 of the Illinois Insurance Code, which provides an extra-contractual remedy to policyholders whose insurer’s refusal to recognize liability and pay a claim under a policy is vexatious and unreasonable.1 Section 155 of the Code is intended to aid the insured and to discourage insurers from profiting by their superior financial positions while delaying in the payment of contractual obligations.2

The Appellate Court of Illinois in Charter Properties, Inc. v. Rockford Mutual Insurance Company,3recently affirmed the trial court’s finding that the insurer’s delay in paying the insured’s claim supported an award of sanctions under section 155 of the Code.

Szechwan Garden was a tenant operating a restaurant within the building owned by Charter Properties. In August 2011, the building collapsed. Rockford stipulated that the policies of insurance covered the collapse, but the parties disagreed over the amount of the loss including the amount of lost rental income because Szechwan Gardens was closed for nearly 49 weeks. Five and a half years after the loss, a jury found that Rockford owed Charter Properties additional monies for lost rental income and building damage. A separate trial was held on Charter Properties’ claim for Section 155 (“bad faith”) relief.

While Rockford made two smaller payments within the first four months of the loss, it made no further payments until March 2012 when Charter Properties filed a complaint with the Illinois Department of Insurance. In June 2012, Rockford returned Charter Properties’ sworn statement in proof of loss. The basis for its rejection was twofold: first, it asserted that the proof was premature because the repairs had not been completed and directed plaintiff to give notice when the repairs were completed so it could conduct a final inspection and determine the costs incurred; and second, it alleged the proof was excessive. Following the rejection of the proof, Rockford’s adjuster admitted that he stopped working on the matter, without completing an inspection or estimate of the damages.

Ultimately, Rockford made its final payments in June 2013, which was seven months after suit was filed, 1 year and 10 months after the loss, and 11 months after Szechwan Garden reopened for business.

Charter Properties’ expert witness testified at trial that the adjuster’s job on behalf of Rockford was to prepare a damage estimate for the building and personal property, but that he failed to do so. Without a complete estimate, the defendant could not calculate its liability, which resulted in a breach of contract. In other words, the policy placed the burden of determining liability on Rockford, but Rockford improperly tried to shift that burden to plaintiff. Rockford presented no expert testimony to rebut Charter Properties’ expert. Instead, Rockford simply argued that the proof was excessive, and therefore a bona fide dispute existed.

The appellate court affirmed the trial court’s finding that the plaintiff encountered unnecessary difficulties from Rockford’s withholding of policy benefits. Specifically, the court pointed to the uncontroverted testimony from plaintiff’s expert who opined that Rockford should have completed the inspection and promptly adjusted the claims but did not do so. It also noted that section 919.50 of the Code required the insurer to either affirm or deny liability within a reasonable time and to offer payment within 30 days after affirmation of liability or offer a written explanation for the offer or denial. Rockford failed to offer a written explanation for the denial and failed to complete an investigation and determination of liability.

The appellate court agreed that Rockford’s long duration of negotiations, stalling tactics, and delayed payment supported the conclusion that Rockford’s conduct was unreasonable and vexatious. The court concluded that plaintiff’s expert opinion comported with common sense that an insurer owes a duty of good faith and fair dealing to provide an estimate, so the insured can proceed knowing the scope of coverage.
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1 Cramer v. Insurance Exchange Agency, 174 Ill. 2d 513, 519 (Ill. 1996).
2 Myrda v. Coronet Ins. Co., 221 Ill. App. 3d 482, 491 (Ill. App. 2d Dist. 1991).
3 Charter Properties, Inc. v. Rockford Mut. Ins. Co., 2018 IL (2d) 170637 (Ill. App. Nov. 8, 2018).

Period of Restoration – Should the Time to Adjust the Claim be Considered? Part II

Iris Kuhn | Property Insurance Coverage Law Blog | December 26, 2018

The effort to mitigate the damage, gather supporting documents, and present an insurance claim, can for many policyholders prove to be the toughest part of the recovery process. After suffering a loss or business interruption, the main priority of most business owners is restoring their businesses or premises as soon as possible – not preparing an insurance claim. While their goal is to achieve the utmost recovery in the shortest period of time, the loss adjustment process can be long and grueling.

Business interruption insurance covers a company’s lost income when property damage forces a termination or slowdown of operations. As discussed in my previous blog, Period of Restoration – Valuing Business Interruption Claims, Part I, the period of restoration under most business interruption policies is typically defined as the length of time it should reasonably take to repair, rebuild or replace property with reasonable speed and similar quality, or the date when the business is resumed at a new permanent location. In many cases, the period of restoration is determined based on a theoretical time period.

Florida law requires that within 90 days after receipt of initial notice of loss, reopened, or supplemental property insurance claim, the insurance company must pay or deny the claim or a portion of the claim unless the failure to pay is caused by factors beyond the control of the insurance company.1 Although, thousands of simple homeowners’ property claims are resolved and paid without recourse to litigation, due to the complexity of the commercial claims, many business owners find the adjustment process frustrating and beyond the 90-day period applicable under Florida law. For many business owners, it is essential to protect their assets as soon as possible as each passing day may bring their businesses to a halt.

The question is then: Should the loss adjustment process be considered in the time period for which losses are to be paid? As a general rule, the time necessary for an insurance company to adjust the loss is not considered in a business income loss time calculation. However, courts have allowed a reasonable extension of the theoretical period of restoration when delays were attributed to the insurance company or occurred through no fault of the policyholder.

In United Land Investors, Inc. v. Northern Insurance Company of America,2 the policyholder’s business was damaged by fire in November 1981. The insurance company made a payment for lost earnings in December 1981, but the repairs did not commence until March 5, 1982, when the insurance company tendered the full amount necessary to return the property to its pre-loss condition. The repairs were completed 12 weeks later.

The insurance company argued that liability for business interruption losses should be imposed only for a 12 week period commencing on November 8, 1981, the date of loss. The court held that in determining the period of loss, it would have to be a consideration that the policyholder could not commence the repairs until the policyholder received the money to complete the work. The policyholder was in no position to contract for or begin the repairs until the policyholder and the insurance company agreed on an amount to be paid and should recovered the business interruption losses from the date of the loss until the repairs were completed 12 weeks after March 5, 1982.

Thus, an insurance company may “be liable for business interruption coverage for the duration of the reasonable period of time needed for [the insured] to reenter business plus any delay attributable to [the insurance company’s] failure to perform its duties under the policy…”3

Another point to take away from this discussion is that insurance companies and policyholders do share a common goal when it comes to resolving the claim as quickly as possible. The policyholder should anticipate that the submitted loss value may be subject to scrutiny and should be ready to provide adequate information and documentation in support of the claim.

Courts have also found that delays attributed to the insured do not extend the period of restoration. To succeed in the loss adjustment process, consider developing skills that will help you remain in control, including, but not limited to, (1) documenting and organizing your claim, (2) cooperating and communicating with the insurance company, and (3) expect challenges and plan ahead. A policyholder that understands and is able to control the loss adjustment process, may have the ability to reach a favorable resolution of his/her claim and avoid unnecessary delays.
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1 Fla. Stat. § 627.70131(5)(a).
2 United Land Investors, Inc. v. Northern Ins. Co. of America, 476 So. 2d 432 (La. Ct. App. 1985).
3 Hampton Foods, Inc. v. Aetna Cas. and Surety Co., 843 F.2d 1140, 1143 (8th Cir. 1988)(citingOmaha Paper Stock Co. v. Harbor Ins. Co., 569 F.2d 283, 290 (8th Cir. 1979)).

How Does My Insurance Claim End Up in Federal Court?

Ian Dankelman | Property Insurance Coverage Law Blog | January 3, 2019

Merlin Law Group clients often have their insurance claim disputes settled with no lawsuit filed. Pre-litigation settlement is frequently in the client’s best interest. Sometimes, filing a lawsuit is the best alternative.

Even when filing suit in state court, insurance companies sometimes invoke their right to have the case heard by a federal court instead of a state court. There are a variety of reasons an insurance company might want to litigate in federal court. First, federal courts often have greater resources to move a case to completion. For example, most federal judges have a full staff of law clerks—lawyers that help the judge research legal issues, delve into the evidence, and draft opinions. Second, federal courts frequently decide cases without oral argument, relying solely on the litigant’s written work product. Third, the civil procedure rules in federal court are well-established, and lead to predictable results on important pretrial issues. Finally, some insurance defense lawyers may think that federal court gives them an advantage to win the case.

Just because the insurance company removed your case to federal court does not mean that the case is guaranteed to stay there. Insureds can seek to return their cases to state court when there are defects in the court’s ability to enter judgment under the Constitution, or if a procedural hurdle under federal law is not complied with by the insurance company. Of course, if the law requires the federal court to keep the case, there is little that can be done to send it back to state court.

Once in federal court, many policyholders are surprised to learn that two judges are often assigned to their cases. The first judge assigned to the case is the United States district judge. District judges have the authority to enter final judgment and possess the full power to make all decisions in a case. Usually, the federal district judge will preside over the trial, rule on evidentiary objections and pretrial motions, and determine the law that should apply.

The second judge assigned to the case is a federal magistrate judge. United States magistrate judges might help the federal district judges resolve pretrial motions, discovery issues, and other pretrial litigation matters. Unlike district judges, federal magistrate judges are not nominated by the president or confirmed by the senate, and do not have life tenure.

Many times, magistrate judges render their rulings in opinions called reports and recommendations. If a party believes that the federal magistrate judge got the decision wrong in the report and recommendation, the party can file an objection and have the federal district judge review the magistrate judge’s opinion. Also, if all parties consent, the magistrate judges can preside over civil cases and enter final judgment. Depending on the case, consenting to a federal magistrate’s jurisdiction might be an excellent choice for insureds, because it is sometimes easier to receive a position on the court’s trial calendar from a federal magistrate judge than a district judge.

Ian Dankelman graduated cum laude from the University of Florida Levin College of Law. While in law school, he was named to the National Order of the Barristers, served as a vice president of the moot court team, and earned the highest grades in Legal Research and Writing and Trial Practice. After law school, he gained valuable litigation and trial experience as an assistant state attorney. Before joining Merlin Law Group, he served from October 2016 to September 2018 as a law clerk for a United States District Judge in the Middle District of Florida.


SB 721 – California Multi-Family Buildings New Require Inspections of “EEEs”

Brenda Radmacher | Construction Law Blog | November 27, 2018

Many in the construction industry and multi-family development field have been closely following Senate Bill 721, or the “Balcony Bill,” regarding new requirements for building owners associated with decks and balconies. After almost a dozen amendments, the “Balcony Bill” finally passed in the state legislature with an overwhelming majority and was signed into law September 17th, 2018, by Governor Jerry Brown.

Balconies and decks, called “Exterior Elevated Elements” (“EEE”) in the statute, are common features in most multi-family buildings in California – where better to enjoy the California sun? However, many of the structures have proven to be problematic at best due to complex intersections of construction trades and design issues as well as limited understanding and effectuation of maintenance. Indeed, the “Balcony Bill” arose largely out of an outcry following the 2015 balcony collapse in Berkeley in 2015, which left six young people dead and another seven injured.

Since the average age of apartments in California is over 40 years, a large segment of the real estate rental market will be affected.

What Buildings Must Comply?

Buildings containing three or more multi-family dwelling units are covered by the Balcony Bill. However, due to significant push back from the common interest development community, condominiums are generally excluded. However, condominium conversions sold after January 1, 2019, must comply with the new inspection requirements.

What are the Inspection Requirements?

The bill covers not just “balconies” or “decks” and their associated supports and railings, but all “exterior elevated elements” – which is notably broadly defined to include “balconies, decks, porches, stairways, walkways, and entry structures that extend beyond exterior walls of the building and which have a walking surface that is elevated more than 6 feet above ground level, are design for human occupancy or use, and rely in whole or in substantial part on wood or wood-based products for structural support or stability of the exterior elevated element – and “all associated waterproofing elements.” The new statute applies to multifamily units with 3 or more units.

The owner of an affected building must ensure that the first inspection is completed before January 1, 2025, and subsequent inspections are required every 6 years after January 1, 2025, or by or before January 1, 2031. The inspections must also include any testing needed to evaluate the conditions. Additionally, condominium conversions sold after January 1, 2019 will need the EEE inspection conducted before the first close of escrow of a separate interest/unit.

However, if a project has submitted for permit after January 1, 2019, the inspection must occur no later than 6 years from the date of certificate of occupancy. Thereafter, the inspection must be performed by Jan 1st every six years. If the property was inspected within 3 years prior to January 1, 2019, and a report was issued stating the EEE were in proper working conditions and do not pose a threat to the public health and safety, no further inspection is required until January 1, 2025. If any immediate threat to health and safety are found, the report must identify that and advise if occupants should be kept out of the buildings, if emergency repairs are recommended, or if shoring is needed. If repairs are recommended, the inspector must prepare a report within 45 days and issue it to the owner and the local law enforcement within 15 days of the report’s publication. If emergency repairs are called for, the Owner is obligated to perform preventive measures including preventing occupant access to the EEE until the emergency repairs are completed.

The inspector’s report must include photos, a narrative, and any test results. In addition, the report must include the repair and replacement work to be performed by a licensed and qualified licensed professional per Health & Safety Code section 17922. Notably, the inspection must include a sampling of at least 15% of each type of EEE.

The report must contain:

  • identification of each type of EEE that does not meet the load requirements
  • assessment of the load-bearing components and associated water proofing elements of the EEE using methods that allow for direct visual observation or comparable means for evaluation of their performance
  • the current condition of the EEE
  • expectations of future performance and projected service life
  • recommendations for further inspections needed

In addition, the repair recommendations are to include work to be done in compliance with the recommendations of the licensed professional providing the report, the applicable manufacturer’s specifications, the California Building Standards Code (consistent with Health & Safety Code §17922(d)), and all local jurisdictional requirements.

What has to be done once an inspection occurs?

The inspector must issue a report with the findings and repair recommendations, if any. If repairs are recommended and there is no emergency situation, the owner has 120 days to apply for a permit and once approved, have another 120 days to complete the repairs, they must be completed within 120 days.

Failure to make repairs timely can be costly as well. If the repairs are not done within 180 days, the inspector (who had been hired by the Owner) has to report the Owner to the local enforcement agency and notify the owner. If within 30 days of this notice, the repairs are not completed, the Owner faces mandatory civil penalties based on a fee schedule set by the local authorities (min. $100/day and max $500/day) until the repairs are completed unless the Owner procures an extension of time from the local agency. Moreover, if the fines are assessed, the local agency can record a building safety lien. If the lien is discharged, released, or satisfied, the notice of discharge must be recorded by the local agency and include the amount of the lien, the name of the agency, the street address, the legal description and assessor’s parcel number, and the name and address of the building Owner.

Who can perform the EEE Inspection?

The requirements for an inspector are fairly broad. A licensed architect, civil and structural engineer, a contractor holding an A, B or C-5 licenses for over five years and with experience constructing multi-story wood-frame buildings are all authorized. Additionally, local jurisdictions can allow specific certified building inspectors from recognized state, national or international associations (e.g., International Code Council). However, a contractor who conducts the inspection cannot perform the repairs called out in his or her report.

Owners of multifamily buildings (and likely mixed use where multifamily is included in the project) with balconies, decks or other exterior elevated elements must pay close attention to their buildings and the requirements for testing and inspections, as well as performing timely repairs to avoid liability under this new law. Real estate developers and landowners of common interest developments (i.e., condos) have a sigh of relief, for now, as there is an explicit provision exempting common interest developments from this law. The idea behind the exemption was due to the fact that the Owner would not have as much control when the project is either a condominium or converted to a condominium, if any such “Owner” could be identified. Due to the nature of all new laws, taking time up front to ensure your actions are going to put you in the best position to comply is highly recommended. Be sure to act early to review your properties and retain legal counsel familiar with construction and this new law as well as a qualified consultant to assist in evaluation of the buildings you own.

Timing Is Everything Assessing the ripeness of declaratory judgment actions in construction-defect claims

Richard Allison and John McCants | CLM | December 15, 2018

Declaratory judgment actions are frequently used to determine coverage under a commercial general liability policy for an insured legally obligated to pay a third party. Third-party liability insurance contracts are indemnity contracts whereby an insurer agrees to pay an insured for insured damages that an insured becomes legally obligated to pay a third party.

Declaratory judgment actions to determine insurance coverage for construction-defect claim damages are commonly brought in state and federal courts in the U.S., and, as the 11th Circuit explains in Greystone Const. Inc. v. National Fire & Marine Ins. Co., courts reach varying results on whether the damages are insured losses. Some courts find that a construction defect is not an occurrence because faulty workmanship is not a fortuitous event or an accident. For these courts, finding no occurrence ends the inquiry, and it is unnecessary to address the presence of property damage.

Other courts may find an occurrence if there is a third-party personal injury or physical injury to tangible property other than the construction project itself. These courts view the occurrence based on who was injured, and not on what caused the injury.

Still other courts find that a construction defect may be an occurrence, and there may be an insured loss assuming that the other requirements of the insuring agreement are met (e.g., there is property damage and no exclusion applies). In jurisdictions that recognize liability insurance coverage for construction-defect claims, allocating what damages may be insured can be a fact intensive exercise for a declaratory judgment action.

Declaratory judgment actions for insurance coverage concerning construction-defect damages typically address either the duty to defend or duty to indemnify. The duty to defend an insured is distinct from the duty to indemnify an insured for damages that a party may recover against an insured. The distinction between the two affects when to commence a declaratory judgment action based largely on what stage of an action triggers either duty.

The duty to defend is generally based on the allegations in a complaint or pleading. As the South Carolina Supreme Court points out in City of Hartsville v. South Carolina Mun. Ins. & Risk Financing Fund, some states do not limit insurers to the four corners of a complaint or pleading to determine the duty to defend.

The duty to indemnify is often based on the findings of the trier of facts (whether a jury or court renders a verdict) including, but not limited to, the kinds of damages awarded to the claimant.

If the issue is whether an insurer must defend based only on the allegations in a complaint, a declaratory judgment action filed at the commencement of the underlying construction-defect action may be ripe for a decision by a court. However, if a state allows an insurer to determine the duty to defend based on information that is outside the four corners of the complaint or a pleading, then an early declaratory judgment action may not be ripe.

In jurisdictions where the duty to defend may be determined from information that is outside the four corners of a complaint, a party may have to look to multiple sources of information that, when combined, lead to the conclusion that there is no duty to defend. Whether there is a duty to defend then becomes complicated because the determination of coverage may involve disputed facts in the underlying action. In such cases, reaching a conclusion on the duty to defend may require a decision that is based on disputed facts. Doing so raises an issue regarding whether the court hearing a declaratory judgment concerning a duty to defend is encroaching on the province of the trier of facts for the underlying action.

If the issue is whether an insurer must indemnify the insured, then a declaratory judgment action that is filed at the time of the commencement of the underlying construction-defect action may be premature for a decision by a court. One assumes here that a state does not have statutory or judicial precedent that mandates the filing of a declaratory judgment action at a certain time or at the commencement of the underlying construction-defect suit.

Federal district courts typically handle premature declaratory judgments in one of two ways. First, a district court may simply find that the court cannot adjudicate indemnity or insurance coverage because doing so is premature. Depending on the jurisdiction, the district court may choose to stay the action. Again, the duty to indemnify is based on the factual findings made by a jury or court in a liability suit, so the duty will not arise or ripen until after a verdict. In Auto-Owners Ins. Co. v. Rhodes, the South Carolina Supreme Court held it was reversible error for a trial court to adjudicate property damage coverage issues before the jury in the underlying action had rendered a verdict on liability and damages: “We hold the declaratory judgment action was procedurally proper save for a ruling on the issues regarding property damages as there are related questions of fact that must be decided by a jury on retrial.” That said, in instances where a provision excluding coverage undisputedly bars coverage for the damages, commencing a declaratory judgment action concerning indemnity may not be premature.

Second, a district court may exercise its discretion to dismiss a declaratory judgment action. In a case or controversy under the Declaratory Judgment Act, a district court “may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought.” In Wilton v. Seven Falls Co., the U.S. Supreme Court “characterizes the Declaratory Judgment Act as ‘an enabling Act, which confers a discretion on the courts rather than an absolute right upon the litigant.’” In Centennial Life Ins. Co. v. Poston, the 4th Circuit further defines when a declaratory action may be proper: “[A] declaratory judgment action is appropriate ‘when the judgment will serve a useful purpose in clarifying and settling the legal relations in issue, and…when it will terminate and afford relief from the uncertainty, insecurity, and controversy giving rise to the proceeding.’” Accordingly, a federal district court may choose to dismiss a declaratory judgment action.

Overall, a determination of insurance coverage for construction-defect damages, particularly for the duty to indemnify, does not usually ripen for a declaratory judgment action until after an underlying judgment or verdict. While this result is logical and understandable, being able to determine insurance coverage for construction-defect damages early is useful in resolving the underlying construction-defect action.