Insurance Companies Know Their Customers Do Not Read Insurance Policies

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

Insurance companies and insurance agents know that their customers do not read their insurance policies. Proof is found by the Squaremouth Insurance Company offering a prize which could only be found if a policyholder read the insurance policy and won a secret contest. Here is the story:

A self-proclaimed ‘nerd’ from Georgia read the often-ignored fine print on an insurance contract — and it ended up winning her $10,000. Donelan Andrews recently bought travel insurance from a Florida-based company, Squaremouth. Andrews and six of her closest friends are traveling to London together in September, and the high school teacher wanted to secure their trip, she told CBS News.

Andrews says as nerdy as it sounds, she always reads the fine print on contracts, policies and agreements. This time, her diligence paid off. Hidden deep within the text of her Squaremouth insurance policy was a contest to win $10,000. The company buried instructions for claiming the grand prize in the fine print of every Tin Leg Travel Insurance contract.

‘If you’ve read this far, then you are one of the very few Tin Leg customers to review all of their policy documentation,’ the fine print read. It included an email address and said the first person who replied would win the prize.

. . . .

Squaremouth explained the secretive contest on their website after Andrews won. ‘We understand most customers don’t actually read contracts or documentation when buying something, but we know the importance of doing so,’ the company wrote. ‘We created the top-secret Pays to Read campaign in an effort to highlight the importance of reading policy documentation from start to finish.’

‘Over the past 16 years, we’ve learned that many travelers buy travel insurance and just assume they’re covered if anything goes wrong, without actually reading the details of their policy,’ Squaremouth wrote. ‘However, this often leads to claims for losses that are not covered. This lack of understanding is one of the biggest reasons travel insurance claims are denied.’

In, When Words Collide: Resolving Insurance Coverage and Claims Disputes, Bill Wilson agrees that virtually nobody reads their insurance policy:

Who reads rental agreements at the counter when renting a car? Pretty much no one. Who reads 78-page software or phone app licensing agreements? Almost certainly no one. Did YOU read the Copyright and Disclaimer page of this book? (That’s a rhetorical question.) Who reads insurance policies? Virtually no insureds and far too few insurance professionals like agents, underwriters, and adjusters. Why? In the case of insureds, one reason might be that the actual policy forms are not provided for days or weeks after coverage is bound. A presumption of an insured might be that, if the insurer doesn’t see a need for the insured to read the policy before entering into the insurance contract and perhaps weeks afterwards, is there really any need to read it when received? Would whether or not an insured reads the policy make any difference in how a claim is resolved?

So, how do customers of the insurance product know what they are insured for? I would suggest that they learn from their insurance agents and from advertising. If Wilson is correct, it is certainly a very precarious proposition because then even the agents who customers rely on are not reading the policies and the often-comedic advertising of insurers.

Policyholders do not read their policies. If they did, few would fully understand what they are covered for. The reality is that most people “hope” they have coverage. After a loss happens, that “hope” is a lot more nervous than at the point of purchase.

Insurance agents are extraordinarily important. Policyholders should select truly professional agents, as I discussed in, Choose Insurance Agents Wisely to Avoid Insurance Coverage Gaps:

Educated, hardworking and professional insurance agents play an important role in the insurance industry. They recognize their obligations to customers extend far beyond being mere order takers and providing the cheapest insurance premium. Instead, they are the agents who procure insurance policies which provide the “peace of mind” the insurance industry promises and advertises to those who purchase its products.

Imitation is the greatest form of flattery, as I have been told, and as such, we will imitate what Squaremouth has done. If you are reading this – you have won free admission for you and up to four others to our 4th Annual Midwest Construction Defect & Dispute Conference in Chicago on May 20th. Travel, food and other expenses are not included. Email to take advantage of this offer and claim your reward!

Contractor Acted as an Unlicensed Public Adjuster, Notwithstanding Assignment of Claim and Benefits

Christina Phillips | Property Insurance Coverage Law Blog | February 22, 2019

Just last week, the Iowa Court of Appeals in 33 Carpenters Construction, Inc. v. The Cincinnati Insurance Company,1 held that 33 Carpenters, a contractor who was the assignee of a hail and wind storm claim, acted as an unlicensed public adjuster.

33 Carpenters, a home-repair contractor, entered into an agreement for the repair of an insured’s claim for hail and wind damage. In exchange for repairing the home, 33 Carpenters would receive any proceeds paid by Cincinnati, the insurer. A formal Assignment of Claim and Benefits (“AOB”) was entered into between the insured and 33 Carpenters. The AOB allowed 33 Carpenters to prosecute, collect, settle, and compromise the claim in its own name.

Cincinnati assigned an adjuster who reviewed the claim, prepared an estimate of the repair costs, and issued payment. 33 Carpenters contacted Cincinnati requesting a further estimate to address additional damages. Cincinnati refused to communicate with 33 Carpenters and would only address its communication to the insured. Ultimately, 33 Carpenters sued Cincinnati for breach of contract, alleging Cincinnati failed to pay it for all benefits due and owing under the insurance policy. Cincinnati denied it breached the policy and filed affirmative defenses which included that in obtaining the assignment from the insured, 33 Carpenters acted as a public adjuster without a license, in violation of Iowa Code chapter 522C (2017), which rendered the assignment unenforceable.

While noting that law favors the assignability of causes of action, the district court ruled that the assignment was invalid as 33 Carpenters was not a licensed public adjuster. The district court found that the website for 33 Carpenters included advertisements to advocate on behalf of an insured with their insurance adjuster and would work directly with the insurance company to ensure all damaged areas of the house are included in the claim. In that regard, the district court found that 33 Carpenters attempted to aid the insured in negotiations with its insurer and was involved in determining how Cincinnati would make its insured whole. The district court found 33 Carpenters was acting as public adjuster without the required license.

On appeal, 33 Carpenters asserted once it had obtained the AOB it was no longer acting on behalf of the insured, but rather on its own claim. In determining whether 33 Carpenters was “acting for or aiding [the insured] in negotiating for or effecting the settlement [with Cincinnati] of a first-party claim for loss or damage to real or personal property,” the appellate court rejected 33 Carpenters’ argument that it was pursuing its own claim, noting that it was a “form-over-substance” argument. That while the assignment was intended by 33 Carpenters to benefit it by allowing it to make a profit, it was fundamentally and primarily a vehicle by which the insured intended to benefit when 33 Carpenters successfully negotiated and effected a settlement with Cincinnati so 33 Carpenters could repair the home. The appellate court found there was no dispute that 33 Carpenters was “acting for and aiding the insured in negotiating for and attempting to effect a settlement of the insured’s first-party claim.” In so doing, 33 Carpenters acted without a license and was in violation of the Iowa Code. As such, the appellate court upheld the assignment as unenforceable and granted summary judgment in favor of Cincinnati.
1 33 Carpenters Construction, Inc. v. The Cincinnati Ins. Co., No. 17-1979 (Iowa App. Feb. 6, 2019).

Restoration Contractors Providing Great Quality Workmanship Are Policyholder Friends But Many Insurance Companies Refuse To Pay For Quality

Chip Merlin | Property Insurance Coverage Law Blog | February 17, 2019

Contractors often tell me and other Merlin Law Group attorneys of the crazy excuses and refusals insurance adjusters give to avoid paying for required construction materials, processes, and practices which constitute quality workmanship. Cheap and non-quality construction is easy to do and often overlooked by policyholders completely unfamiliar with the detailed specifications demanded by manufacturers of materials, building codes and OSHA requirements which must be followed for legal and quality construction to take place. Insurance company claims mangers know that doing construction right is a lot more expensive and demanding than paying for cheap construction.

An excellent article, Quality Construction Management, was published by International Risk Management Institute n/k/a IRMI and concludes:

A contractor must have a robust quality management program as it is critical to the overall success of a construction project. An effective program creates a process for clarifying standards and requirements, established means and methods for managing the process, defines responsibilities and accountabilities, and adds another avenue to more effectively manage the supply chain, while it reduces misunderstanding and potential conflict. It effectively facilitates and manages the collection of data, identifies performance discrepancies and nonconforming work, and substantially increases efficiency by reducing defects and punch list work, which aids in. improving the working relationship with the design team and the project owner. It systematically manages quality and enhances the contractor’s project delivery, increases productivity, eliminates or reduces waste, and ultimately improves profitability.

It does not take a rocket scientist to figure out that quality contractors performing the type of work discussed in the IRMI article cannot possibly stay in business if insurance companies demand “cheap” pricing. Contractors and policyholders reading this post should also read, Insurance Company Adjuster Training Scripts and Role Paying, on how insurance companies teach their adjusters with scripts to avoid paying contractor demanded pricing as well as overhead and profit costs.

Many insurance claims departments have a culture that will only pay for “okay” construction. AT&T’s current advertising campaign about “okay” services and products makes the point. Would you want just an “okay” surgeon or tattoo artist? Would you want your sushi to be just “okay?” Would you search for and buy your grand-baby the “cheapest but acceptable” car seat?

Yet, when it comes to insurance restoration construction, I have never heard an insurance company property insurance adjuster demanding that the contractors providing their pricing, or the pricing found in Xactimate, to be only from quality contractors with the types of processes and culture I quoted from in the IRMI article. They always go cheaper and for “okay” construction. They wrongfully allow the “cheap” contractors to provide data for pricing used by Xactimate.

Quality restoration contractors fighting these adjustment practices are heroes for all of us. Demanding fair pricing which allows for quality and standing up to the insurance industry adjusters is admirable. It is far easier to accept lower pricing and provide cheap and inferior workmanship.

A post about how State Farm tried to influence and obtain “okay” construction and pricing is found in, Membership in Professional Organizations Helps a Small Public Adjusting Firm Achieve a Big Result. Clay Morrison was a State Farm preferred construction vendor. The State Farm claims manger demanded that Morrison provide unethical pricing which would only result in cheap construction. Rather than acquiesce and keep the State Farm business, Clay Morrison rose to the occasion at his moment of truth and refused. He lost State Farm’s business, but he was a champion for all policyholders, his family and himself.

Similar battles are being fought every day by those in the insurance restoration construction trade. Those contractors that follow the rules and refuse to become just “okay” should be congratulated.

It’s a Brand-New Ballgame. . .In Texas When it Comes to Filing Suit Against Your Property Adjuster

Kay Morgan | Property Insurance Coverage Law Blog | February 18, 2019

Texas Insurance Code Section 542A.006, effective December 1, 2017, allows insurers to accept liability for the acts of their adjusters either before suit is filed or after suit is filed. If the election of liability is made before suit is filed, the in-state defendant adjuster never becomes a party if suit is filed eventually. If the election is made after suit is filed, the court must dismiss the adjusters from the suit.

This addition to insurance law is now beginning to play out in court opinions. So far, the score is tied two to two—two wins for the insureds’ team which like a state court stadium and two wins for the insurers’ team which prefer a federal court stadium.

The main issue is: whether a suit non-removable when commenced in state court due to a lack of complete diversity among the parties, becomes removable based solely on a diverse insurer’s election to accept complete liability of a non-diverse or in-state defendant adjuster under Section 542A.006(a) of the Texas Insurance Code. A review of four (4) current Texas decisions reveals each team’s strategy.

First batter up is Massey v. Allstate Vehicle & Property Insurance Company.1 This case concerns a remand from a Harvey insurance dispute that was originally filed in state court against Allstate and four adjuster/agents. Allstate filed its answer and then pitched a strike ball by filing under Section 542A.006, a written election to accept legal responsibility of the four adjusters’ wrongful acts, if any, during claims-handling. The umpire/court signed an order dismissing the four adjusters from the suit which resulted in complete diversity of citizenship of the parties. In the next inning, Allstate hit a potential foul ball by immediately removing the suit to federal court in the Southern District of Texas.

The umpire/court found that the voluntary-involuntary rule applied, and the case should not have been removed. The voluntary-involuntary rule states that “an action nonremovable when commenced may become removable thereafter only by the voluntary act of the plaintiff.2 An exception to that rule is “where a claim against a non-diverse or in-state defendant is dismissed on account of fraudulent joinder.”3 However, here, Allstate conceded that the adjusters were notfraudulently joined so there was no exception to apply and the voluntary-involuntary rule was a grand slam because the removal was not the act of plaintiffs but that of defendant, Allstate. Thus, the removal was a foul ball. A remand was ordered. This case was a home run for insureds who generally prefer a state court stadium.

Next up, in a hail case, Electro Grafix, Corp., v. Acadia Insurance Company,4 a Western District court took a different approach to this same issue of remand and the effect of the new insurance code section. Here, the insurer, Acadia, accepted liability of its in-state adjuster, Odermatt, under Section 542A.006(a) before suit was filed. Acadia hit a potentially foul ball by removing the case. Arguing for fair territory—a remand—plaintiffs contended that Odermatt was not fraudulently joined while Acadia argued the opposite. The umpire/federal trial court conducted a Rule 12(b)(6)-type fraudulent/improper joinder analysis in which the court looks to the complaint/petition to determine whether there is a reasonable basis to predict that plaintiff might be able to recover against the allegedly fraudulent joined, in-state defendant adjuster.5 The umpire/court found that:

Given that any claim that Plaintiff makes against Odermatt will be dismissed under Section 542A.006(c) [because Acadia has accepted Odermatt’s alleged liability], the Court finds that Acadia has met its burden to show that there is no reasonable basis to predict that Plaintiff might be able to recover against Defendant Odermatt.

Accordingly, the Court finds that Odermatt is improperly joined, and this Court lacks subject-matter jurisdiction over the claims against him. Eliminating Odermatt from the suit creates diversity of citizenship between Plaintiff and Acadia. Taken together with the fact that the amount in controversy exceeds $75,000, the Court finds that the requirements of diversity jurisdiction are satisfied, Plaintiff’s motion to remand is denied.6

This was a home run for the insurers’ team which generally likes to be in a federal court stadium.

Following Electro Grafix, and in the very same court in the Western District, is Flores v. Allstate Vehicle & Property Insurance Company,7 Allstate accepted liability of its adjuster in this case after suit was filed and invoking diversity jurisdiction removed the suit to federal court. The suit was removed under 28 U.S.C §1446(b)(3) that allows removal within thirty days of notice of “other paper” which Allstate argued here was the state court’s order dismissing the adjuster for which Allstate had made written acceptance of its liability under Section 542A.006(a).

Plaintiff argued that the voluntary-involuntary rule applied because the case was not removable when filed as the adjuster and plaintiff were Texas citizens, and removal was accomplished by Defendant Allstate–not the plaintiff. Allstate argued improper joinder as the exception to the application of the voluntary-involuntary rule.

The umpire/court, relying on its own previous decision in Electro Grafix, found that the election and dismissal in this suit was involuntary but the exception of improper joinder applied, and ruled removal was proper and denied remand. This was another home run for the insurers’ team. The score stands two wins to one.

However, now with the series only in about the third inning, the insureds’ team rallies in another hail storm suit in the Eastern District, Stephens v. Safeco Insurance Co of Indiana,8 Safeco threw a strike and elected to accept liability of Baker, the in-state defendant adjuster, after suit was filed. In the next inning, Safeco hits a foul ball by removing the suit. The teams argue to the umpire/court. Plaintiff files a motion to remand and Safeco argues improper joinder.

The umpire/court focuses on where the ball landed, i.e., the timing of the insurer’s election to accept liability—either before or after suit is filed—as essential to the court’s improper joinder inquiry. That is – whether an insurer’s election to accept full liability of an adjuster is tantamount to a finding of improper joinder which turns on whether the election is pre-suit or post-suit. If the election is made pre-suit, an adjuster subsequently joined is joined when state law mandates that there can be no viable claims against him. If, however, the election is made post-suit, a diverse defendant-insurer cannot rely solely on the fact that the insured is now prohibited from recovering against the non-diverse adjuster. An election made pre-suit does not challenge the joinder of the non-diverse adjuster and, as a result, has no bearing on whether a plaintiff-insured asserted viable claims against the non-diverse adjuster when joining him to the action.

Simply put, if an insurer elects to accept full responsibility of an agent/adjuster after the insured commences action in state court, the insurer must prove that the non-diverse adjuster is improperly joined for reasons independent of the election made under Section 542A.006 of the Texas Insurance Code.9

Safeco argued that the adjuster was improperly joined because he was dismissed from the action by Safeco’s election under 542A.006; therefore, under the improper joinder test, there was no reasonable basis for the district court to predict that the plaintiff might be able to recover against the adjuster in state court. The umpire/court rejected Safeco’s argument and gave the following abridged version of Safeco’s arguments as follows:

Baker was properly joined when Stephens commenced the action in state court—not disputing that Stephens asserted viable claims against the adjuster; after the proper joinder, Safeco made an election under Section 542A.006 –thereafter foreclosing on any possibility of Stephens to recover against Baker; removal should now he allowed on the basis that Baker was improperly joined. The Court cannot accept this argument as reasonable under the law or logic. Whether a non-diverse defendant is improperly joined is a binary question: the defendant is either a proper party when joined to the suit or the defendant is an improper party when joined to the suit. It does not follow that a non-diverse defendant that is initially properly joined may become initially improperly joined. Again, the focus must be on the joinder.

The court ruled that the voluntary-involuntary rule barred the removal because neither Safeco’s election to accept liability or legal responsibility of Baker nor Baker’s impending dismissal were voluntary acts of Plaintiff. Further, Safeco failed to carry its burden that Baker was improperly joined which would establish the exception to the voluntary-involuntary rule. The court found the ball [law suit] was in foul territory and ordered the suit remanded to the state court stadium. This was definitely a win for the insured’s team.

The present score in this series is tied—two insureds wins to two insurers wins. Both teams need to stay tuned to follow the future outcome and final World Series (Supreme Court) decision about the present conflict of decisions in the Texas federal district courts regarding the issue of removal verses the Texas Insurance Code Section 542A.006. We’re a long way from heading down the stretch.
1 Massey v. Allstate Vehicle & Prop. Ins. Co., 2018 WL 3017431 (S. D. Tex. June 18, 2018).
2 Crockett v. R. J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir. 2006). (Emphasis added.)
3 Id.
4 Electro Grafix, Corp., v. Acadia Ins. Co., 2018 WL 3865416 (W.D. Aug. 14, 2018).
5 See Smallwood v. Illinois Cent. R. Co., 385 F.3d 568, 573 (5th Cir. 2004).
6 Electro Grafix, at *4.
7 Flores v. Allstate Vehicle & Prop. Ins. Co., 2018 WL 5695553 (W. D. Tex. Oct. 31, 2018).
8 Stephens v. Safeco Ins. Co. of Indiana, 2019 WL 109395 (E.D. Tex. Jan. 4, 2019).
9 Stephens, at *6.

Assignment of Benefits Contracts are the Hot Topic of Discussion and Legislation in Florida, North Dakota and Elsewhere

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

Merlin Law Group knowledge manager Ruck DeMinico sent me recent North Dakota legislation pertaining to Assignment of Benefit contacts. This topic was also hotly debated two weeks ago at the Windstorm Insurance Conference in Orlando. Insurance restoration contractors, their lobbyists and attorneys are desperately trying to prevent any changes that would make such contracts more difficult to enter into or enforce. The insurance lobbyists and their public relation firms are doing everything they can to show contractors and their lawyers as evil and greedily taking advantage of the public trust.

The Florida politician primarily responsible for overseeing insurance is Jimmy Patronis. Here is a news article describing his view on the situation:

Technically we have a law on the books that is being legally exploited,” said Chief Financial Officer Jimmy Patronis.

The law the CFO is talking about is Assignment of Benefits. It allows homeowners to sign into an agreement with a third party, such as a water extraction company, or a plumber, and allows the third party to act as the homeowner and seek payment for their work directly from the insurance company.

Patronis believes this should be allowed to happen but says bad actors in the business are taking advantage of it. So much so that in 2006 he says the state had 400 lawsuits involving AOB, in 2018 he says there were 31 thousand.

“You are taking their claim from them and giving them the comfort that you’re going to solve all their problems.” Patronis continued saying, “when essentially now you’re at the mercy of who you’ve just given your claim benefit to. But the bad attorneys and contractors that exploit it we should bury them under the jail.”

Patronis says the easiest way to combat it is to just have the insurance companies do their job.

“I have challenged the insurance carriers through multiple conference calls and just demanding to them do your job, pay the claims, answer the phone calls, take care of the customer.” Patronis says, “If that is being done, if we are doing that then the consumer who is under duress is not looking for solutions that are outside the normal insurance process.”

The CFO says if insurance companies aren’t responding to their policyholders quickly enough, he understands why they are seeking outside help. But he had this message for the bad actors he calls scoundrels.

“What you’ve done is you’ve taken this law on the books and you’ve twisted it and you’re doing nothing but driving up rates and driving out insurance carriers out of the state of Florida,” said Patronis.

At least Patronis sees that the issues, in part, as a two-way street. Not all politicians do.

The National Association of Insurance Commissioners noted the rise of Assignment of Benefit contracts increasing litigation in Florida in a 2017 paper, Emerging Issues Within the Assignment of Benefits Clause:

Over the past decade, the extension of assigning benefits has become seriously magnified in the state of Florida with a plethora of claims involving homeowners assigning their right to recover costs associated with first-party emergency physical damage repairs. Jay Neal, Florida Association for Insurance Reform (FAIR) President and CEO, estimates that in the past decade, lawsuits filed by restoration contractors using an AOB provision have increased more than 1,000% (Neal, 2015). The past five years, however, represents the steepest increase in filed claims.

An article, A Few More Thoughts About Assignments of Benefits, written by Patrick Wraight, who is the director of the respected Academy of Insurance, stated the positive versus negative aspects of the Assignment of Benefit contracts:

The premise of the AOB

Let’s reset again and make sure that we’re all on the same page. An assignment of benefits is a document, or clause in a contract, that allows another party (a contractor, water mediation company, your doctor’s office) to file for, and receive insurance benefits. This process allows the insurance company to negotiate and pay the assignee for the claim, rather than the customer having to pay their contractor first and then file the claim.

In theory, it’s a great way to operate. Think about it. The customer takes one link out of the claim chain. Without the AOB, the process is centered on the customer who spends their time getting an estimate, sending it to the insurance company, negotiating with the adjuster about the most fair claim payment, receiving the payment, getting the contractor to start the work, paying the contractor, and then finalizing the claim (or reopening the claim if the repairs take more money that initially paid, which means starting over almost from the beginning).

The AOB makes it so that the insured can hire a contractor and then remove themselves from the process. All they have to do is drink their coffee, wait for the contractor to finish the work, and pay their deductible. OK, that might be an oversimplification, but you get the point. The insurance company works directly with the contractor to get the repairs going.

The problem with the AOB

As you know by now (because you’re daily Insurance Journal readers), it just doesn’t work that way. Not every insurance company pays the claims that they probably should as easily as they should (sorry insurance people, but it’s kind of true). Not every repair contractor files the correct amount for their claim. Sometimes they inflate the costs. What happens when the insurance company doesn’t want to pay for the costs as presented by the contractor? That’s right, the contractor calls their attorney and (you know it) the insurance company contacts their legal team. What happens with the customer?

The customer finds themselves in the middle of a feud, which might leave them waiting for the work to be done, or worse yet, they find that they are on the hook for the balance if the insurance company wins against the contractor. For the customer, the best case is that they get their repairs paid for and find out later that their insurance premiums go up (along with the rest of us, thanks) to make up for the extra expenses that the insurance company had.

I am not certain where all this is going to lead, but the issue is not just in Florida. Insurance lobbyists, state legislatures and Departments of Insurance have Assignment of Benefit contracts being used by insurance restoration contractors on their national radar.

Nothing ever stays the same. It is easy to predict that the law and use of Assignment of Benefit contracts will not be the same in many states five years from now.