Denied Water Damage Claims and Unethical Adjuster Conduct

Chip Merlin | Property Insurance Coverage Law Blog | July 9, 2018

Denied water damage claims are one of the more frequently handled claims by our law firm. The cost to repair these claims can be quite high depending on many factors including the length of time the water leaked, the length of the leak, the nature of the water, and the location of the water leak itself.

Many insurance companies have recently changed policy language or taken positions so water damage claims are more frequently in litigation. Merlin Law Group recently noted denied water damage claims in Follow-Up: My Insurance Claim Was Denied Because My Water Leak Lasted Over a Period of 14 Days or More – Was the Denial Proper, and Policyholders Beware: When You Hear “Drip…Drop” Think “Tic Tock.”

Insurance adjusters can say and do the most outrageous comments and actions. It results with very upset and frustrated policyholders, especially if the claim is denied. Does that mean that if adjusters act unethically and even in bad faith, that such conduct relieves the requirement that coverage is found?

In a water damage denial case, one court recently answered this question “no” stating:

The central fact issue for the jury in this case was whether the Insureds’ loss fell under the repeated seepage or leakage exclusion of the policy. If so, there was no coverage; if not, there was coverage. The main problem with the jury instructions and the Insureds’ arguments at trial is that the jury could have decided the case solely because the adjuster did not “do a good job” regardless of whether the incident fell within the policy exclusion. The instructions focused on whether the adjuster “properly investigated” or “properly adjusted” the claim and talked about a code of ethics. While such considerations may be appropriate in a bad faith case, they have no place in a simple breach of contract action….The Insureds were free to criticize the adjuster’s conclusions without arguing that he breached a duty or obligation to them. If an adjuster makes a mockery of the code of ethics but the insurance company correctly denies a claim, there is no action for breach of contract.1

I am not certain I agree with this in every instance. Suppose an adjuster agrees to coverage, intentionally instructs the policyholder to do something which destroys the evidence of the cause of the loss, and then changes his position and claims no coverage? I could make up many other scenarios.

But, the court correctly noted that whether an adjuster did a good job does not absolutely mean that such breach of the good faith and ethical duties of the adjuster means that coverage exists.

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1 Citizens Prop. Ins. Corp. v. Mendoza, No. 4D16-1302 (Fla. 4th DCA July 5, 2018).

Follow-Up: My Insurance Claim Was Denied Because My Water Leak Lasted Over a Period of 14 Days or More – Was the Denial Proper?

Marie Laur | Property Insurance Coverage Law Blog | July 4, 2018

In March, I posted a blog on the Hicks v. American Integrity Insurance Company opinion,1 in which a Florida court ruled that policy language stating: “we do not insure…for loss…caused by…constant or repeated seepage or leakage of water…over a period of 14 or more days,” did not preclude coverage for damage caused during the first 13 days of a water leak.

Now, in the case Whitely v. American Integrity Insurance Company,2 the Florida appellate court has ruled in accordance with the court in Hicks and rejected the carrier’s interpretation of the 14-day exclusion in the policy. In Whitely, the insureds, Larry and Sherri Whitely (“the Whitelys”) filed a claim with their insurance company, American Integrity Insurance Company (“American Integrity”) in November of 2012 for water damage that occurred sometime between October 2012 and November 2012. American Integrity inspected the property and determined that the property was exposed to the damage-causing water for approximately 30 days.

American Integrity denied the Whitelys’ claim, citing the policy exclusion that stated, “we do not insure…loss…caused by…constant or repeated seepage or leakage of water…over a period of 14 or more days from within a plumbing…system.”

The Whitelys sued, stating that the policy language was ambiguous since it did not clarify whether the damage that occurred within the first 13 days was covered. The trial court concurred with American Integrity, which argued that the language was unambiguous.

The Whitelys appealed.

The appellate court reversed and remanded to the trial court for additional proceedings, finding that the Whitelys had shown that the property was exposed to the water for more than 14 days and that American Integrity failed to meet its burden of establishing that the loss did not occur within the first 14 days. Therefore, since the damage may have occurred before the 14th day, the policy exclusion may not apply, and a determination of when the damage occurred is a question for a jury to decide.
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1 Hicks v. American Integrity Ins. Co., 241 So.3d 925 (Fla. 5th DCA 2018).
2 Whitely v. American Integrity Ins. Co., No. 5D16-3719 (Fla. 5th DCA June 29, 2018).

Contractors Can No Longer Make Roof Repairs Following Their Own Inspections

Jason Feld and Alex Chazen | Kahana & Feld | May 30, 2018

California law mandates that any person who conducts roof inspections for a fee can no longer effectuate the actual repairs to the same property. Effective January 1, 2018, Business & Professions Code Section 7197 (Unfair Business Practices) deems it to be an unfair business practice for a home inspector who charges a homeowner a monetary fee for inspecting the property, to perform or offer to perform additional repairs due to the inherent financial interest and conflict raised by identifying alleged defects necessitating repairs. The new law is a result of California AB 1357, which was signed into law on October 5, 2017. The goal of the new law is to disincentivize a roof inspector from creating a report for the sole purpose of obtaining a bid to perform those documented repairs. The roof contractor can perform repairs identified in their report only after a twelve month “cooling period” which provides the homeowner an opportunity to obtain multiple bids/estimates for repairs based upon the inspector’s report. The new law also discourages home inspectors from providing a list of contractors who provide monetary referral fees back to the home inspector upon receiving repair work from the homeowner based exclusively on the home inspection report.

The California Business & Professions Code Section 7195(a)(1) defines a “home inspection” as a “non-invasive, physical examination, performed for a fee in connection with the transfer…of the real property…or essential components of the residential dwelling.” Home inspection includes “any consultation regarding the property that is represented to be a home inspection or any confusingly similar term.” Business & Professions Code section 7195(a)(2) further defines a “home inspection” as including energy efficiency and solar. A “home inspection report” is a written report prepared for a fee issued after an inspection. Business & Professions Code section 7195(c). It is noted that a home inspector does not have to be a licensed architect, professional engineer, or general contractor with a Class “B” license issued by the California Contractors State License Board, but “it is the duty of a home inspector who is not licensed as a general contractor, structural pest control operator, or architect, or registered as a professional engineer to conduct a home inspection with the degree of care that a reasonably prudent home inspector would exercise. Business & Professions Code section 7196.

The new law is codified as Business & Professions Code section 7197(a), which states:

“It is an unfair business practice for a home inspector, a company that employs the inspector, or a company that is controlled by a company that also has a financial interest in a company employing a home inspector, to do any of the following: (1) to perform or offer to perform, for an additional fee, any repairs to a structure on which the inspector, or inspector’s company, has prepared a home inspection report in the past 12 months; (2) inspect for a fee any property in which the inspector, or the inspector’s company, has any financial interest or any interest in the transfer of the property; (3) to offer or deliver any compensation, inducement, or reward to the owner of the inspected property, the broker, or agent, for the referral of any business to the inspector or the inspection company; (4) accept an engagement to make an inspection or to prepare a report in which the employment itself or the fee payable for the inspection is contingent upon the conclusions in the report, preestablished findings, or the close of escrow; and (5) a home protection company that is affiliated with or that retains the home inspector does not violate this section if it performs repairs pursuant to claims made under the home protection contract.”

As a homeowner, it is imperative that any home inspection conducted during the purchase, improvement or renovation of your property be conducted by an independent and certified home inspection company that is separate and apart financially from the retained contractor who will actually perform the necessary repairs. It is also a good custom and practice to obtain a home inspection report with the goal of soliciting multiple bids/estimates for repair from licensed, bonded and insured contractors. This is especially pragmatic with regards to roof inspections and solar installation at your home.

Tennessee Court of Appeals Holds Defendant Has the Burden of Offering Alternative Measure of Damages to Prove that Plaintiff’s Measure of Damages is Unreasonable

Gus Sara | The Subrogation Strategist | July 5, 2018

In Durkin v. MTown Construction, LLC, 2018 Tenn. App. LEXIS 128, the Court of Appeals of Tennessee considered whether the lower court properly took judicial notice of an alternative measure of damages to the measure of damages advanced by the plaintiff. The Court of Appeals held that the defendant has the burden of offering evidence of alternative measures of damages if it seeks to argue that the plaintiff’s measure of the damages is unreasonable. The Court of Appeals found that the lower court erred in taking judicial notice of alternative measures of damage when the defendant failed to meet its burden of proof. The court’s holding establishes that, if the defendant does not offer evidence of alternative measures of damage, then the measure of damages introduced by the plaintiff will apply.  

In Durkin, the plaintiff hired defendant MTown Construction (MTown) in 2016 to replace the roof of his residence. After removing the original roof, MTown placed tarps over the structure to prevent water intrusion until the new roof was installed. Subsequently, the interior of the home incurred significant water damage during a rain event. Mr. Durkin sued MTown for the water damage, alleging that MTown inadequately protected the structure from water intrusion. At trial, the plaintiff introduced evidence of the cost to repair the structure, which totaled $118,926.12. MTown did not offer any evidence of alternative measures of damage. The trial court found MTown liable for the damage, but decided that the appropriate measure of damages was the diminution of the market value of the property. The judge took judicial notice of certain aspects of witness testimony[1] to conclude that the diminution in the market value of the home before and after the loss was $144,000, which was the full value of the home as per the plaintiff’s testimony. The judge then subtracted the assessed annual tax of $25,500 and awarded the plaintiff $118,500 for the dwelling. The defendant appealed, arguing that the judge improperly took judicial notice of unsubstantiated and disputed facts to determine the diminished value of the home.

The Court of Appeals acknowledged that, in Tennessee, the proper measure of damages for injury to real property is the lesser of either: (1) the cost of repairing the injury, or (2) the difference in the value of the premises immediately prior to and immediately after the injury (also referred to as the diminution of property value). Generally, the measure of damages will be the cost of repairs unless the repairs are not feasible or the cost of repairs is disproportionate to the diminution in the value of the property. However, the court held that the burden was on the defendant to show that the cost of repairs was disproportionate to the diminution value. While recognizing that a property owner can testify as to the value of his home, the Court of Appeals found that the evidence regarding the post-loss value of the home was insufficient and unreliable. The Court of Appeals further held that the defendant had the burden of proving an alternative measure of damages. Since the defendant failed to carry its burden of proving the diminution of value measure of damages, the Court of Appeals ruled that the lower court should have calculated the damages based on the cost of repairs rather than seek out additional valuation evidence or take judicial notice of certain facts to reach a diminution value. The court remanded the case for further proceedings on the damages issue.

The Durnik case establishes that, in Tennessee, the defendant has the burden of introducing evidence of an alternative measure of damages to challenge the measure of damages presented by the plaintiff and that it is improper for the trial court to take judicial notice of an alternative measure of damages on its own. This case also reminds us of the importance of understanding the measures of damage potentially applicable to a case, and being prepared to offer sufficient evidence in support of the measure of damages that you wish to advance. This case also sheds light on the importance of knowing the value of your claim under each applicable measure of damages, as well as recognizing which measure of damages is likely to apply in your respective jurisdiction.


[1] During cross-examination, plaintiff vaguely testified that he believed that the value of the home on the day before the loss was $144,000, and that on the day after the loss the County Tax Assessor told him that the value was still $144,000. However, plaintiff produced a microbial remediation expert who testified that, because the water in the house remained untreated for over 72 hours, the home required more extensive remediation. Based on the expert’s testimony, the judge disregarded the plaintiff’s testimony about the post-loss value of the home and concluded that the value after the loss was zero because no one would buy the house in such condition. As such, the judge found that the diminished value was $144,000 (the full value of the home).

All “Hail” the Importance of Documenting Claims

Stephen S. Asay | Pillsbury | June 29, 2018

A recent case in the Fifth Circuit, Certain Underwriters at Lloyd’s of London v. Lowen Valley View, L.L.C., provides a valuable reminder to policyholders of the importance of promptly investigating any event that could cause damage, documenting that damage shortly after it occurs, and putting insurers on notice of the potential claim. Failure to do so could forfeit the insurance available for otherwise covered losses.

In 2014, an employee of a Hilton Garden Inn in Texas noticed that the shingles on the roof “looked bad” and called a contractor to investigate. The contractor discovered evidence of significant hail damage, and the owner/operator of the hotel notified its insurance agent of the damage. The agent filed a notice of loss with the property insurer, Lloyd’s, the same day, listing the date of loss as June 13, 2012—about a year and a half prior to the date of notice. The agent based the date of loss on a weather history report that listed nine separate hail events of varying severity between January 2006 and December 2014.

After receiving the claim, Lloyd’s sent an adjuster to inspect the property. The adjuster determined that the roof would need to be replaced at an estimated cost of $429,000. Lloyd’s then retained an engineering firm to analyze the claim. The engineering firm confirmed that the damage was caused by hail and concluded that the most recent hailstorm with hailstones large enough to cause the damage was on June 13, 2012. In a second report, the engineering firm described its first report as concluding that the damage “most likely” occurred on June 13, 2012.

Lloyd’s then denied the claim and—the same day—filed a lawsuit seeking a declaratory judgment that it owed no coverage to the insured. After the lawsuit was filed, Lloyd’s engineering firm identified four different dates on which hail reports and weather radar data suggested there was hail at the location of the hotel. Only one of those four dates, June 13, 2012, fell within the relevant policy period, and the policyholder had no proof of when the damage actually occurred. The only evidence that it happened on June 13, 2012, was the engineering firm’s comment that the damage “most likely” occurred on that date, and the engineering firm stated that it never intended to suggest that June 13, 2012, was the known date of loss.

In Texas, as in most states, a policyholder bears the burden of establishing that its claim falls within the policy’s insuring provisions. The burden then shifts to the insurer to prove that the claim is not covered because of an exclusion or other coverage limitation. However, a policyholder cannot ignore that initial hurdle. Here, because the hail damage could have been caused by any of the four storms, three of which were outside the policy period, the policyholder had to present some evidence that would provide a reasonable basis on which to identify damages caused by the storm that occurred during the policy period. Because the evidence did not show which of the storms had damaged the hotel, the district court granted summary judgment in favor of Lloyd’s. The Fifth Circuit affirmed, agreeing that the policyholder failed to satisfy its initial burden of proof.

Even though the property insurance policy here may well have covered some or all of the damage, a lack of documentation prevented the policyholder from recovering those insurance proceeds. Let this be a reminder to document damages and promptly submit claims—or you too could be faced with a “hail” of losses for which you are stuck paying damages out of your own pocket.