California Regulations Require That an Insurer’s Preferred Vendor Return Property to Its Pre-Loss Condition – A Quick Guide to What You Need to Know

Victor Jacobellis | Property Insurance Coverage Law Blog | August 21, 2019

It is becoming more and more common that insurance companies are recommending and suggesting that their “preferred vendors” perform loss repairs. California offers insureds protection if they opt to use a preferred vendor. Under the Fairs Claims Settlement Practices Regulations, if an insurer recommends a vendor, the insurer is essentially required to guaranty that vendor’s work.

There is a lot of incentive for an insurer to have a preferred vendor perform claim repairs. The vendors will typically perform the work for less than an independent vendor. This is because an insurer’s preferred vendor program will usually require that the carrier is given a discount on labor or materials. Vendors will offer such discounts to get the insurer’s business. Preferred vendors are often water and smoke remediators but can also include flooring contractors and contractors for other particular trades.

An insurer’s use of preferred vendors keeps claim costs down. The preferred vendor’s estimate usually will operate as the insurer’s claim valuation. Once a preferred vendor is suggested and prepares a repair estimate, the insured is often faced with the decision of either: (1) having the preferred vendor make the repairs or (2) taking a cash payment and then having to find a contractor who can do the repairs at the discounted amount offered by the preferred vendor. As you can probably guess, insureds often opt to let the preferred vendor perform the repairs.

California provides protection when a preferred vendor is chosen for loss repairs. The Fair Claims Settlement Practices Regulations require that when an insurer either recommends or suggests a vendor to make property repairs and the insured opts to have that vendor make the loss repairs, the insurer is required to ensure that the damaged property is returned to its pre-loss condition. The insurer is required to do this at no additional costs to the insured. The insurer is also required to ensure the property is repaired in a manner that meets accepted trade standards for good and workmanlike construction. Cal. Cod. Reg. § 2695.9(c)(2).

The Fair Claims Settlement Practices Regulations also imposes additional restrictions on insurers when it comes to suggesting vendors who can perform repairs. An insurer can only recommend a vendor if either: (1) the insured specifically requests a referral or (2) the insurer informs the insured in writing of the right to select any vendor to make the repairs.

For reference, Cal. Cod. Reg. § 2695.9(c) in its entirety provides as follows:

(c) No insurer shall suggest or recommend that the insured have the property repaired by a specific individual or entity unless:

(1) the referral is expressly requested by the claimant; or

(2) the claimant has been informed in writing of the right to select a repair individual or entity and, if the claimant accepts the suggestion or recommendation, the insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and repaired in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations.

The Essentials of Insurance Litigation in USA

Mary Beth Forshaw | Simpson Thacher & Bartlett | August 7, 2019

Preliminary and jurisdictional considerations in insurance litigation

Fora

In what fora are insurance disputes litigated?

Most insurance disputes are litigated in state or federal trial courts. An insurance action may be subject to original federal court jurisdiction by virtue of the federal diversity statute, 28 USC section 1332(a). In this context, an insurance company, like any other corporation, is deemed to be a citizen of both the state in which it is incorporated and the state in which it has its principal place of business.

If an insurance action is originally filed in state court, it may be removed to federal court on the basis of diversity. Absent diversity of parties or some other basis for federal court jurisdiction, insurance disputes are litigated in state trial courts. The venue is typically determined by the place of injury or residence of the parties, or may be dictated by a forum selection clause in the governing insurance contract.

Some insurance contracts contain arbitration clauses, which are usually strictly enforced. If an insurance contract requires arbitration, virtually every dispute related to or arising out of the contract typically will be resolved by an arbitration panel rather than a court of law. Even procedural issues, such as the availability of class arbitration and the possibility of consolidating multiple arbitrations, are typically resolved by the arbitration panel.

Practitioners handling insurance disputes governed by arbitration clauses should diligently comply with the procedural requirements of the arbitration process. Arbitration provisions in insurance contracts may set forth specific methods for invoking the right to arbitrate and selecting arbitrators. Careful attention to detail is advised, as challenges to the arbitration process are commonplace. An insurance dispute that originates in arbitration may ultimately end up in the judicial system as a result of challenges to the fact or process of arbitration.Causes of action

When do insurance-related causes of action accrue?

Insurance litigation frequently involves a request for declaratory judgment or breach of contract claims, based on allegations that an insurer breached its defence or indemnity obligations under the governing insurance policy. Insurance-based litigation may also include contribution, negligence or statutory claims. In order for any insurance-related claim to be viable, it must be brought within the applicable statute of limitations period, which is governed by state law. In determining whether a claim has been brought within the limitations period, courts address when the claim accrued. For breach of contract claims, the timing of claim accrual may depend on whether the claim is based on an insurer’s refusal to defend or failure to indemnify. When a claim arises from an insurer’s failure to defend, courts typically endorse one of the following positions:

  • the limitations period begins to run when the insurer initially refuses to defend;
  • the limitations period begins to run when the insurer refuses to defend, but is equitably tolled until the underlying action reaches final judgment; or
  • the limitations period begins to run once the insurer issues a written denial of coverage.

When a claim arises from an insurer’s refusal to indemnify a policyholder, courts have held that the claim accrues either when the underlying covered loss occurred or when the insurer issues a written denial of coverage.

A legal finding that a policyholder’s claim is time-barred is equivalent to a dismissal on the merits.Preliminary considerations

What preliminary procedural and strategic considerations should be evaluated in insurance litigation?

At the outset of insurance litigation, practitioners must conduct a careful evaluation of possible causes of action in light of the available factual record in order to assess procedural and substantive strategies. When an insurance dispute turns on a clear-cut question of law and could appropriately be resolved on a motion to dismiss or a motion for summary judgment, dispositive motion practice should be considered. For example, if an underlying claim for which coverage is sought alleges an occurrence that arose after the insurance policy at issue expired or alleges facts that fall squarely within the terms of a pollution exclusion, the insurer may file a dispositive motion to seek swift resolution of its coverage obligations. In contrast, where an insurance dispute presents contested issues of fact, practitioners should be vigilant about formulating case management orders and discovery schedules. Insurance-related discovery is often contentious, expensive and time-consuming, and may give rise to disputes regarding privilege or work product protection. In this respect, document retention policies must be implemented and in some cases, confidentiality stipulations may be appropriate. Finally, a preliminary assessment of any insurance matter should involve consideration of whether it is appropriate to request trial by jury or whether to implead third parties, including entities such as co-insurers, third-party tortfeasors or insurance brokers.

Damages

What remedies or damages may apply?

Many insurance coverage lawsuits seek relief in the form of a judicial declaration that articulates the scope of coverage under the insurance policies in dispute. In essence, one or more parties requests that the court enter a ruling that coverage is available or unavailable before addressing the appropriate remedy or damages. If the court issues a ruling declaring coverage to be exhausted or otherwise unavailable, the appropriate remedy or damages may be dismissal of the action with or without costs imposed on the insured.

Where courts find coverage to be available, they often go on to address the issue of remedy or damages in a separate phase of the case. The most common measure of damages in insurance litigation is contractual damages, which may be awarded in connection with a breach of contract claim. The amount of contractual damages is typically based on the coverage due under the relevant policies (or, for a claim of rescission, the amount of premiums to be refunded). In complex insurance litigation, such as that involving multiple layers of coverage with injuries or damage spanning an extended period of time, the damages calculation may be more involved, often requiring expert testimony.

Aside from basic contractual damages, additional amounts may be recovered in certain insurance disputes. For example, some jurisdictions may allow consequential damages based on economic losses that flow directly from the breach of contract or that are reasonably contemplated by the parties. Additionally, some jurisdictions permit attorneys’ fee awards under certain circumstances.

Whether attorneys’ fees awards are available may be governed by state statute, relevant case law or, in some cases, the insurance agreements themselves. Arbitration clauses, in particular, may provide for the payment of the prevailing party’s attorneys’ fees and costs. While attorneys’ fees may be difficult to recover, the threat of an attorneys’ fees award may affect the dynamics of settlement negotiations.

Infrequently, the possibility of tort-based or punitive damages can arise in insurance litigation. These damages may come into play in the context of claims alleging that an insurer acted in bad faith or violated state unfair or deceptive practices statutes.

Where monetary damages are awarded in an insurance action, a corollary issue is the imposition of pre-judgment (or post-judgment) interest. The imposition and rate of interest may be determined by the parties via explicit contractual language. Absent governing language, the question of whether a prevailing party is entitled to pre-judgment or post-judgment interest and, if so, the applicable interest rate, is typically governed by state law. When pre-judgment interest is allowed, determination of the accrual date is paramount because opposing positions can differ by many years, and resolution can have a significant impact on the total damages award. Courts have utilised different events for determining the interest accrual date, including when payment was demanded, when payments are deemed due under the applicable policy and when the complaint was filed.

Under what circumstances can extracontractual or punitive damages be awarded?

Certain states permit policyholders to seek extracontractual or punitive damages when an insurer allegedly has acted in bath faith or violated unfair or deceptive practices statutes. Bad faith allegations frequently relate to an insurer’s refusal to defend or settle an underlying matter, but can also stem from other conduct, such as claims-handling practices. Some jurisdictions do not recognise tort claims arising out of an insurer’s breach of contract. In those jurisdictions, a policyholder’s recovery typically is limited to contractual damages, with no opportunity for a punitive damage award. Some courts in such jurisdictions, however, may allow recovery of extracontractual damages (eg, lost income or related economic losses) against an insurer if the losses were foreseeable and arose directly out of the breach of contract.

In jurisdictions that recognise bad faith tort claims against an insurer, policyholders face several obstacles when seeking punitive damages. In most but not all cases, a punitive damages claim is not actionable without an adjudication that the insurer has breached the insurance contract. Even where an insurer is held to have breached a contract, and a policyholder has established bad faith or statutory violations, punitive damages are extremely difficult to recover. Most jurisdictions strictly require the party seeking punitive damages to meet a high burden and to prove ‘wilful or malicious’ conduct, ‘malice, oppression or fraud’, or ‘gross or wanton behaviour’ by the insurer. Furthermore, some jurisdictions impose an elevated burden of proof, requiring a bad faith showing to be made by ‘clear and convincing evidence’.


California’s Insurance Adjuster Act of 2019 Is Coming

Derek Chalken | Property Insurance Coverage Law Blog | August 5, 2019

California’s Senate Bill 2401 is making its way through the legislature and will hopefully bring some important changes to the way insurance companies train their out of state adjusters who handle California based policyholder’s claims. The bill, also known as the Insurance Adjuster Act of 2019, was created by Senator Bill Dodd to eliminate confusion and delays caused by out-of-state or unaware adjusters.

Of significance, the bill will require the California Department of Insurance (DOI) to produce an annual notice describing the most significant California laws pertaining to property insurance policies (including those regarding declared states of emergency) and require the out-of-state adjusters to submit a signed certification, under penalty of perjury, that they have read the most recent notices issued by the DOI, as well as a handbook for adjusting claims prepared by the DOI.

Another part of the act requires that carriers assign a primary point of contact for insureds during a state of emergency. This law was drafted with the hope that it would limit confusion created when carriers assign multiple adjusters to a single claim. For example, insurers often have a desk adjuster, independent field adjusters, contents adjusters and even ALE adjusters working on a single claim. The new bill will require the DOI to provide training standards for these adjusters and require the carrier provide a single point of contact. Insureds simply do not know which person to contact. The new law aims to streamline these communications with the insurer through one person.

These guidelines will hopefully increase the accountability insurers have when they assigned out-of-state adjusters to deal with increased claims activities following catastrophic disasters. If you feel your carrier is not abiding by their obligations to you, contact a Merlin Law Group attorney for a consultation.
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1 https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201920200SB240

Business Interruption: Strategies for Resolution

Iris Kuhn | Property Insurance Coverage Law Blog | July 1, 2019

A business interruption claim does not always end up in litigation. There are basic techniques that an insured may consider expediting and presenting a claim that may result in a fair resolution of a business interruption claim. The Business Interruption Book: Coverage, Claims, and Recovery,1 is a great source for information on business interruption issues and it provides a non-exclusive checklist to facilitate claims handling.

1. Review the policy

A policyholder should obtain a complete copy of the policy from the agent and/or the insurance company. The best practice is to review the policy along with any attached endorsements to determine the many types of losses and expenses that may be covered. The insured then should review the post-loss conditions in the event of a covered loss and take appropriate actions.

2. Notice

One of the insureds’ most important duties under the policy is to provide notice to the insurance company of a potentially covered loss. Depending on the policy’s language, the notice provision may require that notice be provided “as soon as practicable,” “immediately,” “within a reasonable time,” or within some other time specified by the policy. Often, all that is required is sending a description of the covered loss to the broker with directions to forward the information to the insurance company.

Failure to timely comply may result in claim denial. In most states, failure to provide timely notice will not bar coverage unless the insurance company was “prejudiced” by the late notice. In some jurisdictions, the insurance company may avoid affording coverage by showing that the timing of the notice was unreasonable under the circumstances.

In Florida, a denial for failure to give timely notice creates a rebuttable presumption that the insurance company has been prejudiced as a result thereof.2 Therefore, the policyholder has the burden of presenting sufficient factual evidence to overcome this presumption and the court must determine if the time between the loss and the notice was reasonable under the facts and circumstances.3

3. Proof of Loss

Most property policies require the insured to submit a proof of loss within a certain amount of time that outlines the categories of covered losses. The submission of a proof of loss often will trigger the time within which the insurance company must pay or deny the claim. In the business interruption claim context, it is common practice to submit a proof of loss to document the agreement between the insured and the insurance company on the amount of an advance payment requested by the insured.

4. Cooperation

The duty to cooperate often extends to making facilities, witnesses, and relevant, nonprivileged documents available to the insurance company and may require the insured to submit to an examination under oath. It may further require that the insured provide proprietary or sensitive information to the insurance company if that information is relevant to the adjustment of the loss.

If the insured has privilege and confidentiality concerns, it is important to involve an attorney regarding the substantive issues and to execute confidentiality agreements to protect such communications from compelled disclosure later.

Failure to cooperate with this policy provision may result in claim denial.

5. Mitigation

With respect to business interruption coverage, a policyholder is often required to exercise due diligence to repair covered property damage and resume operations. Therefore, after a loss, an insured should quickly evaluate whether there are reasonable steps he/she can take to avoid additional business or property losses. A policyholder may also want to consider informing his/her insurance company of the mitigation efforts to provide an opportunity for input and to avoid dilemmas after the fact.

6. Cost Tracking

In general, the insured bears the burden of measuring, documenting, and establishing the claim. To facilitate claims “handling”, the insured should systematically track all potential covered losses and establish internal accounting procedures. Having an inventory before a loss can save the insured from the daunting task of reconstructing pre-loss costs and post-loss projections from scratch.

Insurance industry experts recommend documenting and supplementing your claim for insurance benefits. The lack of documentation may result in further delays and potential non-recovery even though the policy may have covered some or all of the damage.
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1 Torpey, Daniel T., et al. The Business Interruption Book: Coverage, Claims, and Recovery, 2nd edition. National Underwriters, 2011.
2 Tiedke v. Fidelity & Cas. Co. of New York, 222 So.2d 206 (Fla. 1969).
3 SeeEmployers Cas. Co. v. Vargas, 159 So. 2d 875, 877 (Fla. 2d DCA 1964).

Digital Transformation in Insurance: Pull Ahead of the Pack

Christian Grandy | Introhive | July 9, 2019

Are you a leader or are you a follower? Over the past few years, insurance giants have pulled ahead in their digital transformation efforts, rolling out new features that improve the customer experience, optimize back-end efficiencies, and create a framework for ongoing innovation.

The stakes around digital transformation are high and choosing to hold may affect a company’s long-term solvency. In fact, 44 percent of insurance leaders think that, in the future, “most existing insurers will not survive, at least in their current form.”

Even if you’re lagging behind, it’s not too late for your firm to break away from the pack and embrace digital transformation and disruptive technology. However, being a leader, or even a fast follower, is not for the faint of heart. It requires a top-level commitment—and resources—to become a digital-first and data-driven organization.

If you want to move away from the pack, try these three digital transformation strategies first.

BUILD A FUTURE-PROOF DIGITAL EXPERIENCE

Insurers are actively expanding their digital infrastructure and contemplating what the ideal insurance experience will be in the future. According to a survey conducted by FRISS, 69 percent of insurers currently work with an online distribution channel and nearly 70 percent have adopted mobile apps. But true digital transformation extends far beyond isolated forays into the digital space.

For real, lasting success, you need to focus on an overall digital framework that meets anticipated needs and also accounts for unexpected changes in the future. To this end, carriers are prioritizing emerging technology and partnering with technical platform providers, like Introhive, for support.

The growing push for a “digital first” mindset among carriers, with customers at the center, has led to an emergence off-the-shelf technology that meets the most pressing digital technology needs. However, this leads to a new challenge for organizations, particularly larger, global, teams: disparate, unconnected pools of marketing, business development and sales data. Enter enterprise relationship management.

Digital Transformation Journey

Commonly referred to as ERMs, enterprise relationship management platforms analyze prospect and customer contact data (and automate it, in Introhive’s case) to give organizations a better understanding of their business relationships.

A good ERM platform also works in tandem with your existing, and potentially far flung, tech stack. So it’s not only a balm for global business growing pains, it also supports growth, cost reduction, and risk management.R

IMPROVE BACKEND PROCESS EFFICIENCY WITH AI

Most carriers have updated legacy systems to incorporate basic digital communications, paperless documents, online data entry, and mobile applications. However, optimization of back-end processes needs to remain central to long-term digital transformation.

Through improved efficiency, carriers will be able to shift human and financial resources to more meaningful activities. To this end, carriers are looking to artificial intelligence (AI) and machine learning, with 77 percent of insurers saying they believe AI will transform their role in the future.

One way AI can help is by automating routine, repetitive and rule-driven tasks such as CRM data entry with CRM data automation, which can save employees about 5.5 hours of data entry per week. (Request a demo to see how it works).

Another area of focus is predictive modeling, which carriers are increasingly using for pricing (48 percent), underwriting (45 percent), fraud detection (32 percent) and risk mitigation (28 percent).

PRIORITIZE THE CUSTOMER EXPERIENCE

The digital revolution has forever changed the business landscape. This is decidedly evident when it comes to the customer experience. As soon as next year, the customer experience is expected to officially overtake product and price as the key brand differentiator.

More than ever before, customers are demanding a consistent experience across channels. In fact, 98 percent of companies believe that personalization has a profound impact on success but over half of companies indicate that data quality remains an issue.

To improve the end-to-end customer experience, insurance carriers are embracing data transformation and big data technologies to translate data into insights. Relationship intelligence automation is also playing a critical role, expanding and correcting contact information and, at the same time, alerting carriers to concerning relationship trends with valuable customers.

Carriers are also looking to new technologies to transform the customer experience. The Internet of Things (IoT) is being evaluated as a possible area for digital transformation and 60 percent of insurers believe IoT can drive changes in consumer behavior. However, data and a clear strategy for IoT implementation remain obstacles for many companies.R

TAKE THE LEAD IN DIGITAL TRANSFORMATION AND RELATIONSHIPS

Digital transformation will continue to be a defining trend for insurance carriers over the next decade. Being a leader or a fast follower can set your firm up for long-term success. But the key will be creating a flexible framework that allows your firm to shift focus onto revenue-generating partnerships, invest in technologies to improve the customer experience, and build-out the backend for long-term scalability.

Relationship intelligence automation improves the efficiency of backend processes while providing insurance carriers improved relationship data, which allows you to better serve your current and future customers.