Insurance Appraisers May Determine the Cause of Loss

Mollie Pawlosky | Dickinson Law | November 1, 2018

In a case of first impression, Walnut Creek Townhome Association v. Depositors Insurance Company, the Iowa Supreme Court has held that insurance appraisers may determine the cause of loss in addition to the amount of damage.

Walnut Creek Townhome Association submitted a claim to Depositors Insurance Company for hail damage to the Association’s roofs.  Depositors felt that damage had been caused not by hail, but rather by defective shingles.  As part of the dispute, Walnut Creek exercised its right to an appraisal under the insurance policy.  Each party picked an appraiser, and an umpire was picked.  The three individuals then examined the roofs and prepared a report.

Two of the three on the panel opined that damage in the amount of approximately $1.4 million resulted from hail damage.  After a bench trial, the court found in favor of Depositors.  The trial court held that Walnut Creek had not proved that the storm was the only cause for damage.  The trial court also ruled that the appraisal award was not binding on the parties.

The Iowa Court of Appeals reversed, finding that the trial court was bound by the appraisal.  The Iowa Supreme Court granted further review, for the first time addressing whether parties are bound not only by appraisers’ decisions of valuation, but also by the appraisers’ causation decision.

The Court recognized the historical importance of insurance appraisal provisions, which can resolve insurance disputes without a formal lawsuit.  Since the 1940s, the Iowa Code has contained an approved appraisal provision for property insurance policies.  Iowa’s provision is similar to provisions adopted by 45 other states.  Courts are only allowed to set aside appraisal awards if the record demonstrates fraud, mistake, or misfeasance of the appraiser or umpire.  Depositors did not raise such arguments, so the appraisal award was binding.  The question was: Was the appraisal binding as to the amount of damage alone, or was the appraisal also binding as to what caused the damage?

Courts across the country are divided as to whether appraisers determine the cause-in-fact of damage.  The Iowa Supreme Court ultimately found that the “better-reasoned cases” hold that appraisers necessarily recognize causation when determining the amount of loss.  For example, if an appraiser is determining the amount of “storm damage,” the appraiser is not just assessing damage, but the appraiser is also stating that the damage is from a storm.

Without fraud, mistake or misfeasance, the district court was not free to make its own factual determination as to whether there was hail damage, even if the court disagreed.  The appraisers’ findings remained subject to coverage exclusions and limitations, which the trial court decides.  Thus, the Court remanded the case, with directions for the trial court to accept the appraisal award and then determine if any coverage defenses applied.

Colorado Notice Standard Update For Residential and Commercial Property Damage

Timothy Burchard | Property Insurance Coverage Law Blog | August 24, 2018

Many of us in Central Colorado remember the hail storm that wreaked havoc on the Denver metro area in May 2017. What happens when hailstorm damage to your property does not manifest itself for a period of months, or even a year later? Should a claim be denied for being reported once discovered? Unfortunately, the standard surrounding late notice continues to be unclear in the Colorado courts today.

Earlier this year my colleague, Jonathan Bukowski, discussed the 2017 Colorado Federal Court decision rendered by Judge Arguello,1 where the trial court applied the Traditional Notice Ruleto the issue of late notice, providing that “failure to notify the insurer within a reasonable time constitutes a breach of that contract requiring a justifiable excuse or extenuating circumstances explaining the delay.” In relying upon the Traditional Notice Rule, Judge Arguello concluded that the policyholder’s lack of familiarity or sophistication in insurance matters was not a justifiable excuse for its delayed notice to the insurance carrier. In short, ignorance of contractual requirements, does not excuse the duty to notify your insurance carrier of a potential covered claim.

More recently, Colorado Federal District Court Judge Martinez, issued an opinion in Sunflower Condominium Association v. Owners Insurance Company,2 in which he applied the Notice-Prejudice Rule, instead of the Traditional Notice Rule. Importantly, unlike the more stringent Traditional Notice Rule which requires proof of a justifiable excuse for delay in notifying a carrier of covered damages, the Notice-Prejudice Rule offers policyholder’s the opportunity requires the court to:

  1. Determine whether an insured provided their notice timely, through evaluation of whether the timing of the notice and the reasonableness of any delay;
  2. If such notice is determined untimely was the delay unreasonable, determine whether the insurance carrier was prejudiced by such untimely notice.

Located in Aurora, Colorado, the Sunflower property is a multi-family complex of condominiums which sustained damages resulting from a hail and wind storm that occurred on September 29, 2014. Sunflower first submitted its claim for storm caused damages over fourteen months later in December 2015. When Sunflower and Owners could not agree upon the amount of loss, Sunflower filed suit for breach of contract and the unreasonable delay and denial of covered benefits.

During litigation, the court considered several facts demonstrating Sunflower may have been aware of the damages much earlier and could have provided notice sooner – a Sunflower board member had filed a claim for damages to her car one month after the hail storm, the board had received a work proposal for the property that indicated hail damage in April 2015, and a contractor informed a Sunflower board member of the hail damage during a phone call that summer.

Agreeing that Sunflower had multiple opportunities to deliver notice to Owners sooner, Judge Martinez ultimately determined that the timing of Sunflower’s notice was untimely and unreasonable. Judge Martinez then turned to the second step of the Notice-Prejudice Rule – did the untimely notice prejudice the insurance carrier’s investigation of the claim. Judge Martinez ultimately determined that Owners investigation had been prejudiced by Sunflower’s unreasonable delay in providing notice of the claimed damages, as multiple hail storms had occurred between the claim and the September 2014 hail storm.

While this decision led to the unfortunate demise of Sunflower’s claim, Judge Martinez’ pivot towards the Notice-Prejudice Rule may provide Colorado policyholders a step towards the majority approach applied throughout the country. This approach provides a more level playing field between policyholders and insurance carriers, and hopefully it is a step towards a new standard in Colorado. However, the Sunflower case provides an important reminder to always provide notice to the insurance carrier at the first sign of damage to your property to avoid any late notice arguments down the road. While you may have strong and supportable reasons for delaying notice to an insurance carrier of covered damages, the court can always see things differently.
1 Cherry Grove East II Condo. Assoc. v. Philadelphia Indem. Ins. Co., No.1:16-cv-02687 (Colo. D. Dec. 27, 2017).
2 Sunflower Condo. Assoc., Inc. v. Owners Ins. Co., No. 1:16-cv-2946-WJM-NYW (Colo. D. May 14, 2018).

Federal Court Ruling Vacates Hail Claim Appraisal Award, Highlights Appraiser Abuses

Denise Johnson | Claims Journal | July 26, 2018

A recent decision by a Colorado federal appeals court could have significant impact on hail claims and appraisals across the country.

Copper Oaks Master Home Owners Association v. American Family Mutual Insurance Co. involves a claim of hail damage that led to a dispute regarding damages.

According to the facts outlined within the opinion, Copper Oaks managed several residential buildings in Lakewood, Colo., at the time of the loss. On September 9, 2013, a hail storm allegedly caused property damage to the Copper Oaks complex. Due to debris scattered about the premises, the property manager, Mark Richardson, contacted Derek O’ Driscoll of Impact Claim Services, LLC, and requested he conduct a free inspection of the building roofs. At a November 2013 board meeting, O’Driscoll discussed his roofing evaluation and offered to represent Copper Oaks as public adjuster on its anticipated claim to American Family.

A month later, a separate report commissioned by Richardson found that Copper Oaks was “severely undercapitalized given the size, age and condition of the complex.” The report found that the HOA was severely underreserved – it had $70,112 in reserves, just 11 percent of the recommended amount of $625,597 to carry out extensive repairs needed. A special assessment of $1500 per unit was recommended but there was no evidence that was conveyed to the unit owners.

Copper Oaks hired Impact Claims in March 2014 as its public adjuster and agreed to pay a contingent fee of 15 percent of any insurance award.

American Family was first notified of the loss in April 2014. The insurer inspected the property damage and provided an estimate of $620,979 as the replacement cost value (RCV). The insurer issued payment of $497,765.43, the actual cash value of the loss, in July 2014.

Impact Claims determined Copper Oak’s loss to be much higher than the amount paid by American Family. Later in 2014, O’Driscoll estimated the total damage due to the hail storm at nearly $3.6 million. Upon learning of the increased damage estimate, American Family hired Madsen, Kneppers & Associates to appraise the loss. After an inspection, the firm issued a report estimating the total RCV loss at $608,398.49.

Disappointed with the amount American Family initially paid on the claim, Copper Oaks filed suit in state court. American Family had the case removed to federal court. The Amended Complaint stated four claims: 1) a request for declaratory judgment as to the appraisal process and award; 2) a request to compel an appraisal award in accordance with process specified in the Policy; 3) breach of contract in failing to pay the amounts owed under the Policy; and 4) unreasonable delay in payment in violation of C.R.S. 10-3-1115 and 1116.

Besides the dispute on damages, the parties disagreed as to whether the complex was actually damaged by hail during the storm. The court noted there wasn’t any contemporaneous evidence that hail had impacted any part of the property – “no statements of occupants, photos or the like.”

A requirement when the value of a claim is disputed is that the parties to the policy must engage in an appraisal process to determine the value of the loss.

The parties were ordered to participate in the appraisal process. The policy requires each party to appoint a “competent and impartial” appraiser. The two appraisers then jointly select a neutral umpire. Each appraiser submits an opinion as to the amount of the loss to the umpire. Upon the agreement of the umpire and at least one of the appraisers, the amount of the loss is conclusively determined.

The appraisal process, according to Steven Badger, a Dallas attorney with Zelle LLP, “was intended to be an amicable and expeditious approach to resolving disputed insurance claims. Appraisal clauses have been found in insurance policies for over 100 years, with the process serving as a valuable way to bring disputed claims to closure without the need for lawyers or lawsuits.”

Copper Oaks selected George Keys of Keys Claims Consultants, Inc. to act as its appraiser. American Family selected James Whipple. Keys and Whipple selected Robert Norton as the umpire.

Keys’ appraisal, submitted on February 29, 2016, found that “every roof, every elevation, every chimney, and virtually all of the siding on every building at the Copper Oaks’ property had either been damaged by hail or, if undamaged, would nevertheless have to be replaced in order to fully repair the hail damage.”

His initial loss estimate was $4,968,115.62 and was later revised to $5,066,238.99.

Whipple’s damage appraisal came in at $406,234.29.

Norton, as the umpire, concluded that there was some hail damage, but not nearly as much as Keys claimed. In July 2016, Norton proposed an appraisal award of $3,061,201.44. Neither appraiser agreed with the umpire’s proposed amount leading to Norton’s advisement that if they couldn’t agree, he would circulate a proposed final award of $2,943,919.72.

According to the opinion, Keys submitted his bill to Copper Oaks a week after the appraisal award of $2,873,085.35 was announced. The bill reflected 666.40 hours of work, all charged at a rate of $350 per hour, totaling $233,240. Of importance was that there wasn’t any differentiation in hourly rates based on the tasks performed or by the person performing the tasks.

In January 2017, the parties announced a dispute over the validity of the appraisal award. Copper Oaks sought to enforce the appraisal award, while American Family filed a motion to vacate the appraisal award.

During a hearing, the court bifurcated the allegations within the complaint into claims that concerned the appraisal process (Claims 1 and 2) and claims that concerned breach of contract and statutory bad faith breach of contract (Claims 3 and 4).

American Family contended that the appraisal award should be invalidated because the appraiser selected by Copper Oaks and the umpire were not impartial. Copper Oaks responded that American Family i) waived any objection to Keys and Norton, ii) was estopped from challenging them, and iii) its request is barred by the doctrine of laches.

Prior to and during this case, there were several judicial opinions in unrelated cases involving Keys that disqualified him as an appraiser and vacated associated appraisal awards.

Analysis of records and testimony by the appraisers led the court to determine that It was essential that the appraisal award be high enough to allow Copper Oaks to pay the bills of Keys, O’Driscoll, and related vendors as well as sufficient enough to allow Copper Oaks to make the repairs. The court noted that “Copper Oaks was required to obtain an appraisal award of nearly 128 percent of actual repair costs, simply to break even.”

After a bench trial to determine the sufficiency of the appraisal award, the court stated it intended to grant American Family’s motion to vacate the appraisal award. The Court reasoned that Keys was not “fair and competent”, because he had a “direct material interest in the amounts determined by the appraisal process” and because he did not disclose “facts that a reasonable person would consider likely to affect the appraisers interest in the amounts determined by the appraisal process.”

The court’s decision disqualified Keys and invalidated the appraisal award. The court stated, “Mr. Keys’ appraisal was so bereft of methodology and supporting evidence as to be completely implausible.”

The court deemed Norton as also not, “fair, competent and impartial.” This, too, invalidated the appraisal award.

According to the federal court, judgment was entered in favor of American Family on the first and second claims in Copper Oaks’ Amended Complaint. As a result, the court stated, “Because the vacatur of the appraisal award nullifies any determination as to amount that existed at the time of filing this action, Copper Oaks had no standing to bring its third claim, sounding in breach of contract for failure to pay.”

Thus, Copper Oaks third claim was dismissed.

Copper Oaks’ fourth claim for relief, based on the allegation of an unreasonable delay, was scheduled for determination by trial.

The decision highlights changes in the appraisal process over the past decade, said Badger.

“A cottage industry has emerged comprised of individuals who inject themselves into the appraisal process for their own financial gain. Since the appraisal process is not governed by any formal procedural rules or ethical guidelines, the process is now ripe for abuse, manipulation and outright fraud,” said Badger. “With this cottage industry, no longer is the objective to achieve a prompt and fair resolution of the claims, but to extort the highest possible payment from the insurance company to maximize profits to the contractors, public adjusters, appraisers and lawyers who are all part of these schemes.”

Badger is the author of several articles on fraud abuse in hail claims published by Claims Journal, including The Emerging Hail Risk: What the Hail Is Going On?

“The Copper Oaks matter is a prime example of the abuses that have sadly become commonplace in the insurance claim appraisal process, particularly in Texas and Colorado,” said Badger. “Sadly, it took federal court litigation to remedy the clear abuses that took place during this appraisal process. ”

Badger described the common abuses seen in the appraisal process.

“These abuses include significant and unsubstantiated increases in the alleged damages once the matter is in appraisal, appraisers motivated to jack-up claim values based on having a financial interest in the outcome, undisclosed friendly relationships between appraisers and umpires, and literal extortion by umpires when the insurance company appraiser refuses to sign their excessive proposed awards,” he said. “All of these schemes were present in the Copper Oaks matter.”

New schemes pop up every frequently, he added, describing a recent one where a policyholder appraiser charged $2,500 per hour, up to 20 percent of the appraisal award.

“It’s outrageous,” Badger said. “The clear intent with that fee is for the appraiser to receive a 20 percent contingency fee on the appraisal award, which is absolutely forbidden in both Texas and Colorado.”

Though the federal court decision in this case should aid in bringing awareness to the issue, Badger said fighting the schemes is an ongoing battle.

“All the insurance company wants is a level playing field – where both sides pick impartial appraisers and work fairly to achieve a prompt and fair resolution of the claim,” Badger explained. “Regardless of who prevails, if the process is fair then it achieves its intended purpose. But there was absolutely nothing fair about the process in the Copper Oaks case. And the federal judge exposed it. Hopefully this well-written decision will serve as a much-needed warning to the entire cottage industry engaged in these appraisal schemes.”

Catching ‘Storm Chasers’: How Roofing Oversight Rules are Reshaping the Industry

Katy Tomasulo | Construction Dive | May 25, 2017

Colorado, Texas, Missouri and other Midwest and Southern states are known for their heavy storms, bringing wind, tornadoes and hail. Increasingly, they’re also becoming known for fraudulent roofing contractors, a phenomenon in which companies prey on homeowners following major storm events and take off with their insurance money.

In Missouri, “it’s changed the landscape entirely,” said Jason Shupp, president of St. Louis-based Ferguson Roofing and past president of the Roofing and Siding Contractors Alliance (RSCA), a regional association serving Missouri and parts of Illinois. “How any contractor goes to market has changed quite a bit.”

Fraudulent storm chasers also generate a sense of urgency among homeowners that isn’t always necessary. “They have a sense that they have to move really quickly, which isn’t always the case,” Shupp said. That’s because this kind of “storm chaser” knows that they must close the deal quickly before the homeowner researches other options.

Another common tactic is the promise of waiving any applicable insurance deductibles and a cost-free roof. Many states, including Texas, have laws against contractors waiving or rebating deductibles.

It’s important to note that not all “storm chasers” are rogues. “There are legitimate companies whose entire model is moving to where the work is,” says Reid Ribble, CEO of the National Roofing Contractors Association (NRCA). If a big hail storm goes through Dallas, for example, there won’t be enough local contractor capacity to meet heightened demand. There are legitimate companies that move across the country, providing a boost of labor as needed. Legitimate storm chasers set up shop in the area for several months, meet the local licensing criteria and carry insurance.

But there’s another class of contractor that is unlicensed, uninsured and under the radar. They often walk door to door, collecting deposits or taking control of insurance claims and then disappearing. And it’s those operators that lawmakers and fellow contractors are trying to stop.

Regulations vary

One challenge for consumers and contractors alike is there is no national governance over roofing contractors. Requirements are different in every state and even local jurisdictions — some may require a license, others a registration, and still others have no requirements at all.

In addition to those differences, insurance requirements vary by state. Some require a homeowner to have the work completed within a certain number of months after the damage has occurred, even if some repairs can wait until after contractor demand has died down.

The insurance claims process has shifted, says Steven Badger, partner at Dallas law firm Zelle LLP. Before, if a roof was damaged, the homeowner called the insurance company, an adjuster came out to do an evaluation, the homeowner hired a local contractor and the roof was replaced. With that process, most insurance claims were amicably resolved, he said.

Today, however, illegitimate “storm chasers” inject themselves into the process alongside a rising number of public adjusters, who put claims submissions together, and a growing stock of plaintiff’s lawyers. That means more claims end up in a lawsuit. (Badger says that’s the case for as many as one-third of hail claims in Texas.) Often, insurance companies will settle even the frivolous lawsuits because it’s less expensive than going to trial. Settlements, in turn, can drive up insurance costs. The increase in lawsuits has some insurance companies restricting coverage for hail damage and even leaving certain markets, he said.

“By having some form of licensing and consumer protection regulation, we believe we can root out some of these bad actors and encourage Texas consumers to only sign up with reputable contractors.”

Steve Badger

Partner, Zelle LLP

The Texas legislature has recently enacted new requirements to address abuses in the litigation area – but not the illicit work of illegitimate contractors. That could soon change. In March, legislators introduced a bill that would create a voluntary certification for roofing companies, which would help consumers select contractors.

Seeing firsthand the abuses occurring in Texas, Badger has been one of the biggest local supporters of such initiatives, going door to door in the Texas State Capitol to advocate for registration and certification requirements that would protect local consumers and businesses.  The legislation, which had broad support from leading roofing industry trade groups, was left pending in a House committee, essentially quashing it for the session. Badger expects the issue to be raised again in the next session.

“This is a significant consumer protection issue where homeowners are getting ripped off all across Texas, but unfortunately our legislature will not act to protect homeowners from this problem,” Badger said. “By having some form of licensing and consumer protection regulation, we believe we can root out some of these bad actors and encourage Texas consumers to only sign up with reputable contractors.”

The Texas Public Policy Foundation, a nonprofit described as promoting personal responsibility and free enterprise, called the bill “unnecessary and an improper expansion of government,” saying that there are already ample resources through which consumers can evaluate contractors, such as the Better Business Bureau and Yelp.

Other states are working on similar legislation. Kentucky recently passed a bill that protects homeowners against contractors who inflict further damage on a roof in order to expand the scope of work.

In 2013, Kansas enacted legislation that requires roofing contractors to register with the state. A year prior, Colorado passed legislation requiring a contract between the contractor and owner for all residential work over $1,000. Among its provisions is a prohibition against the contractor acting as a public adjuster unless licensed to do so.                                                                                                                                                           Missouri doesn’t currently require registration or licensing for roofing contractors, a detail Shupp is hoping will change with time. Legislation to create a voluntary registry of roofers was under consideration during the state’s 2017 legislative cycle. Despite the RSCA’s efforts, the bill ran out of time before it could be considered.

Strategies for contractors and consumers

“Real roofing contractors who actually put on roofs for a fair price ought to be concerned about the damage these interlopers are doing to their industry,” Badger said.

Indeed, fraudulent actions by traveling storm chasers can reflect negatively on roofers everywhere. “The good contractors now have to spend part of the sales and marketing process reestablishing the credibility” of the whole industry, Shupp said.

Building pros can be proactive by educating homeowners on the dangers of fraudulent non-contractors long before the storms come. One way for contractors to do so is by maintaining personal or business memberships in local and national associations, which lends verifiable credibility.

For example, RSCA members in Missouri and Illinois must follow a code of ethics, been in business for three years and have insurance. Similarly, members of the Colorado Roofing Association must have been in business for two years, sign a code of ethics and carry liability protection of at least $500,000, among other requirements. The Roofing Contractors Association of Texas has established its own licensing program, hoping to provide a way for its members to distinguish themselves from dishonest storm chasers.

“It’s a feeding frenzy after a storm when contractors come in and consumers don’t always know who they’re buying from.”

 Reid Ribble

CEO, National Roofing Contractors Association

When it comes to evaluating roofing contractors, remodelers and consumers alike should do their research. Request initial recommendations from trusted sources, ask the contractor for references and follow up with them. Distributors are another good source for qualified installers. Local and regional roofing associations often have member directories and lists of licensed contractors in the area.

“Using someone your neighbor or family or friends have used is the safest, most direct route to not getting scammed by someone who is operating illegally,” Ribble said. Ask for their license and insurance. While some states do not require a license, every legitimate contractor will have insurance.

“It does require a certain level of due diligence,” Ribble said. “It’s a feeding frenzy after a storm when contractors come in and consumers don’t always know who they’re buying from.”

Insureds Cannot Shift Burden to Indentify Claimed Damage

Summer L. Frederick | Zelle LLP | March 17, 2017

The first-party insurance claims process has always been pretty simple for the typical insured: call the agent to report a claim, identify and quantify the claimed damage, work cooperatively with the insurance adjuster to support the claimed damage, and hire contractors to repair the damage. It has traditionally been a collaborative process that effectively resolved the overwhelming majority of first-party insurance claims without incident.[1]

With the onslaught of hail litigation in Texas, the traditional model is now changing. And not for the better.

Since 2012, hail claims in some parts of Texas have been increasingly likely to involve attorneys, lawsuit, or public adjusters.[2] Data collected by the Texas Department of Insurance shows that between 2011 and 2012, public adjuster involvement in a claim increased by 900 percent.[3] In that same period, the likelihood of a policyholder to sue an insurer increased by 1,400 percent.[4] Indeed, hail claim litigation has become a burgeoning business in Texas. As a result of the dramatic increase in lawsuit filings, courts have been saddled with sorting out issues such as the improper joinder of adjusters, late notice, concurrent causation and whether claims survive payment of appraisal awards. Litigation concerning these issues continues.

Another issue garnering recent attention in the courts involves a more fundamental aspect of the insurance claims process: the insured’s burden to identify and quantify claimed damage.

The Insured’s Fundamental Burdens

Texas law has always been clear that as the party seeking coverage, the insured has the burden to establish a covered cause of loss during the applicable policy period.[5] The traditional method of claim resolution is consistent with Texas law on this point. The onus is on the insured to contact the insurer and identify and quantify the damage it claims is payable under the insurance policy.[6] The insurer has no burden to actively seek information regarding additional damage when the insured has made no report of such. Yet, as discussed below, a tactic utilized in litigation with increasing frequency seeks to shift this burden to the insurer.

A Developing Trend Seeks To Disrupt The Traditional Claims Model

It is now common in Texas hail litigation for lawsuits to include damage components the insured never previously identified or quantified. Specifically, instead of the traditional claims process described above, the current process follows a pattern such as this: the insured files a lawsuit for breach of contract and a myriad of extracontractual claims following an adjustment process during which there was never any dispute as to the damage identified and quantified. New damage components appear for the very first time in an estimate attached to a presuit demand letter or in a lawsuit filed by the insured.

As an initial matter, this seems to fly in the face of equity. How could the basis for breach of contract be the failure to pay a claim on a damage component that was never presented to the insurer? How could an insurer have even potentially performed a thorough inspection when it never knew the insured expected it to inspect alleged damage? How could it have made a payment for damage the insured never quantified? Doesn’t this trend permit the insured to shirk the fundamental contractual obligation it has when it submits an insurance claim?

League City v. Texas Windstorm Insurance Association

In January 2017, the First District Court of Appeals in Houston agreed that an insured could not recover for breach of contract when it identified property damage components for the first time only after suit was filed.[7] In League City v. Texas Windstorm Insurance Association, the insured made wind damage claims for “various” locations following Hurricane Ike. The insurer paid for identified damage and closed the claim. Instead of making supplemental damage claims, the insured sued for the insurer’s failure to inspect “numerous additional structures.” Upon notice of suit, the insurer requested the insured to identify all damaged locations. The insured did not. The insurer demanded appraisal, but the insured still did not identify all damaged locations. In fact, it did not identify all damaged locations even when the court ordered it to do so. The case proceeded to trial, at which time the insured claimed the insurer failed to conduct a reasonable investigation and make payment for damage to 29 properties. The properties were not part of its original claim, and were not part of the appraisal. The insurer never even knew they were at issue.

The insured argued the insurer would have known of the damage if it had adjusted the loss properly. The jury disagreed, finding the evidence showed the insured breached the policy’s prompt notice provision and the insurer was prejudiced because lack of notice prevented it from conducting a reasonable investigation and making a timely payment.[8] The court agreed. It noted that without communication, the insurer could not have known whether the insured expected further investigation, adjustment or payment, or if it agreed with the adjustment and payment that had already been made.[9] The court observed that in order to avoid coverage, the insurer must show that 1) the insured failed to comply with the prompt notice provision, and 2) the insurer suffered prejudice as a result.[10] In this case, the notice was wholly lacking.[11] To this end, the court held:

When an insured’s failure to comply with a prompt-notice requirement causes prejudice to the insurer, it defeats coverage. [The insurer] established that [the insured’s] failure to comply with the prompt-notice requirement caused it prejudice. This negated [the insured’s] breach-of-contract claim and resolved the issue of coverage in [the insurer’s] favor.[12]

Ultimately, the insured’s breach of contract claim failed.

League City addresses the problematic situation that arises when an insured accepts a claim payment without dispute, files suit without first attempting to resolve a problem, and then complains that various other property damage components were never addressed. It is consistent with other emerging Texas precedent on this issue. League City, as well as the cases noted below, suggest that Texas courts running up against this gross misuse of the claims process, see through the ruse.

Other Texas Courts Also Reject The New Tactic

Given its blatantly obvious nature, it is not surprising that iterations of the tactic in League City have been called out before. In 2015, the Fifth Circuit refused to accept the insured’s argument that general statements in a pleading, without more, constituted notice of an additional claim.[13] The court agreed that prompt notice was required as soon as practicable, and determined that when notice was not given until more than two and a half years after a hurricane, and until after appraisal had taken place, the insurer was prejudiced as a matter of law. This was because the insurer was at least substantially deprived of the right to investigate the loss.[14]

Additionally, Judge Micaela Alvarez in the United States District Court for the Southern District of Texas has now addressed this issue three times.[15] In 2015, she twice addressed the situation in which the insured accepts a claim payment, fails to identify additional damage and then simply files suit for breach of contract.[16] Both times, she noted that the insurer has no general duty to pay claims when it receives no notice of damage. Failure to notify the insurer of the claimed damage is a breach of the policy’s prompt notice provision.[17]

Similarly in 2016, Judge Alvarez determined that insureds could not support a suit for breach of contract when they accepted a payment for recoverable depreciation and did not dispute the amount of recovery or advise the insurer of further damage prior to filing suit.[18] She held: “The fact that Plaintiffs are dissatisfied with the damages paid is not the result of [the insurer’s] failure to fulfill a policy obligation; instead, it results from Plaintiffs’ knowing failure to even submit damages to [the insurer] prior to filing this lawsuit.”[19]

Some Legislative Help

The Texas Legislature is presently considering Senate Bill 10, which is specifically directed at addressing many of the common abuses taking place in Texas hail damage claims. One aspect the legislation seeks to remedy is the increasingly common abuse of adding new damage components for the first time in litigation. Senate Bill 10 creates a requirement that the insured provide meaningful prelitigation notice to the insurer, including identifying and quantifying damage components it seeks to recover in litigation. While this does not excuse the insured’s failure to comply with its burden to identify and quantify damages during the actual claims process, the Senate Bill 10 requirement would at least provide the insurer with additional information before a lawsuit is filed, affording the insurer an opportunity to resolve legitimate disputes prior to years of litigation.


It is time to return the traditional insurance claims model to the Texas claims process. The legal manipulation of the process, as witnessed in League City and similar cases, must be curtailed. These cases make clear that accepting payment, staying silent, dropping a lawsuit out of nowhere, and then complaining that more damages are owed is a practice which grossly departs from what the claims process was intended to be. Further, the current practice wholly disregards the insured’s burden under the policy while simultaneously obliterating the insurer’s ability to comply with the law. But — the jig is up. In light of League City and other recent decisions, attorneys who continue to manipulate the claims process by adding damage components for the first time in litigation now do so at the peril of having such claims dismissed in their entirety.

Perhaps, these attorneys instead will tell potential clients (typically referred by roofing contractors, public adjusters and other case solicitors) to first call their insurers, present the additional claim components and try to resolve claims amicably without the need for attorneys and litigation.

Yeah, right.


[1] This issue is discussed in our firm’s article: Brett A. Wallingford, A Worrying Insurance Trend: Litigation, No Cooperation, available at, August, 2016. The article at hand presents an update of the topics discussed in Mr. Wallingford’s article.

[2], p. 4.

[3] Id. at p. 10.

[4] Id.

[5] Progressive County Mut. Ins. Co. v. Sink, 47 S.W.3d 715, 718 (Tex. 2003).

[6] See, e.g., Evergreen Nat’l Indem. Co. v. Tan It All, Inc., 111 S.W.3d 669, 675 (Tex.App. – Austin 2003, no pet.)

[7] League City v. Tex. Windstorm Ins. Ass’n, 2017 WL 405816 *9 (Tex.App. – Houston [1st Dist.] Jan. 31, 2017, no pet. h.).

[8] Id. at *6.

[9] Id. at *9.

[10] Id.

[11] Id. at *12, *19-23; see also PAJ v. Hanover Ins. Co, 243 S.W.3d 630, 636 (Tex. 2008); Nat’l Union Fire Ins. Co. v. Crocker, 246 S.W.3d 603 (Tex. 2008).

[12] League City, 2017 WL 405816 at *9.

[13] See United Neurology, P.A. v. Hartford Lloyd’s Ins. Co., 101 F.Supp.3d 584, 617 (5th Cir. 2015).

[14] Id. [15] See Fregoso v. State Farm Lloyds, 2016 WL 1170104 (S.D. Tex. Mar. 24, 2016); Maria v. State Farm Lloyds, 2015 WL 8618435 (S.D. Tex. Dec. 14, 2015); Martinez v. State Farm Lloyds, 2015 WL 7571840 (S.D. Tex. Nov. 24, 2015).

[16] Maria, 2015 WL 8618435; Martinez, 2015 WL 7571840.

[17] Maria, 2015 WL 8618435 at *6; Martinez, 2015 WL 7571840 at *6.

[18] See Fregoso, 2016 WL 1170104 at *4 – *5.

[19] Id. at *4 – *5.